Many people have been e-mailing me to say – Tom, stocks are super expensive right now. What should we do?
They have a point.
If you look at this chart of stock PE ratios – which reflect how expensive stocks are compared to company earnings – American stocks are at one of the most expensive points in history.
Does that mean the market is about to crash?
Market crashes and corrections are VERY hard to predict.
As Peter Lynch said: “Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.”
Or as they say – ”Time in the market beats timing the market.”
High PE ratios don’t necessarily mean the market is about to crash.
High PE ratios DO mean investors should have lower future profit expectations – but this can happen in many different ways.
Yes, you could have a crash.
But the market can also grow slowly for awhile or it can stagnate – without ever crashing.
What’s more, sometimes high stock prices are followed by YEARS of excellent returns.
Back in 2017, stock prices were pretty high too – though not as high as today.
A lot of people warned about a coming crash. . .
And then the market went on to outperform for years.
High US stock prices are primarily driven by expensive US tech stocks.
And US tech stocks are expensive because they are tremendously profitable. . .
and their profits have been growing tremendously fast.
This means high stock prices may be justified and not a bubble. . .
. . .but there is still significant risk.
Because if the tech sector runs into trouble, stocks may fall quickly and dramatically.
If you’re concerned about high US tech stock prices, what can you do?
Well, first, make sure your basics are covered.
Keep a safety cushion of uninvested cash.
Check that your portfolio matches your risk tolerance (if you’re fearful, 100% stocks may not be for you).
But if you can’t sleep with your money invested in expensive US tech stocks. . .
. . .there are alternatives.
Small cap or mid cap stocks or non-US markets are not nearly as expensive.
Over the long term, calm and patient investors get rewarded.
The best approach is usually to pick a long term strategy and stick to it, not paying much attention to market ups and downs.
But if you’re constantly worried about your portfolio, that is an important signal.
It may mean you are taking too much risk for your personal risk tolerance – which could lead to bad decisions if the market falls.
If this is the case, you may want to recalibrate your portfolio while stocks are still expensive.
I help busy Europeans become confident passive investors through a practical, step-by-step training program called The Index Masterclass.
Click here to access my free training for European investors.