I know as passive investors you try to accept the ups and downs fatalistically, and avoid trying to improve things because timing's difficult to do.
I'm not a passive investor, and not an index investor, for the most part, so I am used to going beyond a regular steady-buying approach. I know I need to look at what I am buying and owning.
(I should clarify that I'm not a trader. I want to buy and hold very long-term, much like an index investing approach. I just try to use research to buy better profit-makers than the index average.)
By many measures, current prices are crazy.
To quantify that, let's look at risk and reward. The reward is the cashflow the shares (or index funds of shares) give. If an investor reasonably wants a 10% annual return, that suggests a fair price of 10x earnings. By that measure the market is priced at about double what it should be.
At that, it contains some risk. And it is competing - a savvy investor will be looking at this subdued reward (down to 5%) and comparing it to the risk-free option. For a lot of people that is short-term US treasury bonds, and they're giving 4.3%. That's very nearly the same return, for no risk.
That risk has some impact on the value of these investment opportunities, and in the normal course of things 4% for no risk and 10% for risk sounds about balanced. Right now we're way out of balance.
This means that at some point a pin is going to burst the bubble, and prices will normalise. We're in a market that's priced at double what it should be.
Will it crash? Maybe, or it could stagnate, with prices remaining fairly static over a long period whilst earnings catch up.
When will it crash? No-one knows. And I am not nearly smart enough to try to make a prediction. It could continue motoring along for a couple more years, I have no idea.
What to do about it?
Because no-one honestly knows *when* a correction will happen, it's more tempting to take the passive, fatalistic approach and just ride it out.
In my own case it's harder to bury my head in the sand. I don't have the arms-length comfort of an index fund - I'm mostly in Berkshire Hathaway shares, so I can easily see their earnings and am very aware of their value. $40 of earnings for a $500 share means an 8% return. Less overblown than the market in general, but it's still lower than usual, and making me wary. When markets fall, they drag everyone along with them.
I am at the point of topslicing a little and keeping some cash for a rainy day. New contributions will add to that cash. If/when I can buy again at sensible prices I'll do so.
As to making risk predictions, I think the new US administration has made things worse. Their pro-business reputation gave stock prices a further bump up, meaning prices got further out of line with earnings, and then there's the pinprick factor. The market becomes febrile and we're one pinprick away from an event which triggers a loss of confidence and a crash tends to follow. I think most of us would agree that this administration is less competent than others, so I wonder if they will screw it up. Both US government debt and the debt of American financial institutions has been allowed to rise to risky levels, and I wonder if that will be the flashpoint.
Another risk, closer to the cause of the bubble, is AI. The market-dominating companies are pouring their earnings into their scramble for AI capability, rather than feeding them to investors. If confidence in that should falter, and investors retreat, that could be the trigger too.
I'm not suggesting you do anything; just airing my thoughts and looking for opinions, so that we can make more informed choices together.
If you're interested, here's someone else's similar take on this: https://www.youtube.com/watch?v=DDY_MACVvlI