High? Low? Who Knows?

Is the stock market too high? It’s impossible to know. We know it was too high in early 2008, just as we know it was too low in early 2009. How many of you sold your stock holdings in the summer of 2008 and - here’s the hard part - bought back in by the spring of 2009? Those who claim to have done both were either incredibly lucky or self-deceptive. 

A recent article, “Time to Worry About Stock Market Bubbles” (stated as fact - with no question mark at the end) in the New York Times, David Leonhardt, emphatically states that “the evidence, as I read it, suggests that stock prices are now high.”

To reach that conclusion, Leonhardt relies on research by recent Nobel Prize winner, Robert Shiller showing stock prices, relative to corporate earnings, are historically high.

Shiller hedges his market pessimism, a bit, by stating “We obviously can’t know which way stock prices are headed.”

What’s an investor to do? Should you sell now? What if prices keep rising? When do you get back into stocks? We know that short-term interest rates practically guarantee an after-inflation loss.

Neither the article’s author or Professor Shiller offer much in the way of actionable advice. As the article concludes, Leonhardt writes, “I’m not predicting that the market is going to fall 12 percent or 50 percent.”  He wisely adds, “And if I did, you should stop reading this column.” 

So what is the point of a column like this? The intent is elusive. Nowhere is it suggested that you try to sell your stocks. That would be foolish given that stocks have risen 75% of the time over the past 80 years (and given the fact that we cannot predict the future).

In the end, the author could have spared over 900 wasted words by cutting to the inevitable chase, buried in the second to last paragraph when he implores us to avoid being “tempted (or terrified) by the siren song of a rising market. For most people, the sensible path is still to find a low-cost way to save for retirement, typically through diversified index funds.”

While it may be boring, this and almost every other responsible article on investing can be summed up in 4 words from another Nobel Prize winning economist, William Sharpe; “Diversify. Keep Costs Low.”

Read the article.