Should you invest in stocks now, when markets are at all-time highs and just about every valuation metric is showing the markets to be highly overvalued?
According to investment advisors and fund managers who are paid commissions and fees based on the amount of assets they have under management, you shouldn’t worry. The markets are going to keep going up over time and therefore you should continue to invest your funds even when asset prices are at high levels.
And it’s not only those who will benefit financially from your investment who will tell you that now is just as good a time as any to invest.
There are plenty of people out there who believe you should always be buying because there is no way to time the market and it’s better to be invested at all times than to get out at the wrong time and miss a whole lot of upside. This position is styled as a conservative one.
But what about the value side?
Would you generally want to buy an asset for more than it’s worth? And if so, why?
Why would you want to buy into the stock market when it has only been more overvalued one other time in history and that was during the dot com bubble?
Think about what the potential upside is versus what the potential downside is. Yes stocks can go up for a while longer, but the business cycle is going to kick in sooner or later. And expansions are always followed by contractions, and contractions always by expansions. The economy has been growing for 9 years now, which is the second longest expansion in U.S. history.
The Shiller P/E ratio was higher only once before, during the internet bubble.
Think about it this way, if a recession is approaching, and recessions do approach after strong expansions, especially in periods of monetary tightening, such as the period we’re in right now, then why invest in the face of an approaching contraction?
The markets have moved up on the back of a strong economy and low interest rates. And while the economy continues to send very strong signals, the Federal Reserve is raising interest rates, an activity that usually ends in recession. Combine that tightening policy with the extremely high valuations we have right now and that spells a recipe for disaster.
Now, if you do think that stocks are overvalued, but there is no alternative or no other game in town, what about cash? Why not sit out for a while and let valuations return to normal levels?
If you have your 401k set up for automatic investment, how do you reconcile that with the fact that the markets are overvalued? Do you believe that it’s okay to dollar cost average in your 401k even if there is a big downturn? Think back just a few years to the financial crisis and what happened to people’s retirement accounts. It’s a time to be cautious, and definitely a time to set aside a rainy day fund that isn’t tied to the markets.
Of course your investment decisions are entirely up to you and the economy may continue to grow for a while on the back of some new policies that drive increased consumption or increased government spending.
Personally, I’m out at these levels and I have been for a while. When the market reprices, I’ll pick up some quality stocks. And if it never does go down I’m comfortable staying out.
Be sure to check out my list of free investment resources if you’re interested in learning more about a value-based approach to investing.
Consider the latest memo from Howard Marks. It’s an extremely informative piece written by a billionaire value investor.