Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

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rockstar
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by rockstar »

illumination wrote: Sun Sep 13, 2020 10:54 am If we're going to say the stock market has to normalize to a lower PE ratio because that's what it used to be for so long, don't we also have to say that interest rates "normalize" to much higher rates?

What would that do to returns if you invested in intermediate or long term bond funds because you thought stocks were too expensive and interest rates dramatically increased? It could be devastating to a portfolio.
I think, 10+ year treasuries are far more expensive than equities right now. The S&P 500 has barely budged this year.
Keenobserver
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by Keenobserver »

rockstar wrote: Sat Sep 12, 2020 7:44 pm
Robot Monster wrote: Sat Sep 12, 2020 5:34 pm
rockstar wrote: Sat Sep 12, 2020 3:17 pm
physixfan wrote: Sat Sep 12, 2020 11:57 am Maybe we are in a new era now... The 10 yr treasury yield is likely to stay below 1% for decades, and stocks look cheap as long as their CAPE is below 100...

Maybe 10 years later, when all the treasury bonds offer negative nominal yields, stocks with any finite number PE are dirt cheap...
What you say above reminds me of Japan. But we have one thing going for us that Japan doesn't: population growth.
Japan not only has a dwindling population which "will fall by a further 8 million by 2030 unless changes are made," but a good part of their existing population is old and and gray. "Japan has the highest old-age dependency ratio of all OECD countries – there is one person over 65 for every two people between the ages of 20 and 64. And this ratio is rising." Source
The US is aging as well. This is partially offset by immigration.
That ia good for professions catering to the aged IE healthcare, nursing homes, assisted living
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firebirdparts
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by firebirdparts »

rascott wrote: Sat Sep 12, 2020 9:54 am P/Es are only relevant when adjusted for underlying interest rates. For all we know 30x may well be the "norm" for decades..... if interest rates are going to stay sub-1%.
This is super important, but it seems like it’s not a very popular topic of conversation.

To the OPs question, I don’t think it can break, but if interest rates rise, the present value of all future cash flows through will fall. It’s fundamental. The question is really a question about dealing with sequence of returns. If you just accept that you can act on what is knowable, then you’d have a portfolio based on that and you wouldn’t hesitate to put money in that portfolio.
A fool and your money are soon partners
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mrspock
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by mrspock »

FIby45 wrote: Sat Sep 12, 2020 9:02 am Firstly, I consider myself a boglehead investor. I auto invest monthly in low cost index funds. Mid-30's with a equity/fixed allocation of 75/30. 50% US equities, 25% emerging, 25% developed (that works for me.) Very large emergency fund.

I understand the general value of "don't try to time the market" but does this ever break? I think the US market historically trades at 14-17 p/e- and right now we are at 30x.

At some point doesn't the stick to your allocation and "just invest" philosophy break? If we were at 40x earnings? 50x earnings? 100x earnings? (I realize (50x + has not been reached.)

I am reading "Irrational Exuberance" and also recently read "Once in Galconda" which adds to me thinking about this.

I should state- I feel the same way about the SoCal coastal real estate market- why would I buy a $1.5 MM house when I can rent that house for $3,500/mo? I think housing is overpriced here and not sustainable.
You are only seeing one side of this. Buy n' Hold investors are unswayed both ways, we do not shift from our AA's when things are good or bad. The idea here is things even out. Secondly, when you are an accumulator, you naturally buy whatever is out of favor (i.e. buying low) to get back to your desired AA, in good times you naturally buy more bonds when times are good, when times are bad as they were in March, we poured money into equities.

Nothing "breaks" at any time, as you are basically dollar cost averaging over very long periods of time.

I would not equate real estate with equity investing, very different animals. Commissions to buy/sell RE are dramatically higher, price discovery as a result is far slower, carrying costs are different etc.

Finally, I would caution you not to look exclusively at metrics such as CAPE or PE ratios, these are only part of the story. The context or environment (e.g. interest rates) in which they exist is important when looking at them. This is really hard, error prone and subject to all sorts of human bias. For this reason, buy n' hold investors simply forgo all of this, and let things even out over time.

Bonus point: Consider a world where you have a substantial taxable account, say with hundreds of thousands or millions in capital gains. Consider the tax consequences if you churned such an account selling equities when you thought the market was overvalued. How sure would you need to be if it means cutting a $100-200k check to Uncle Sam if you decided to sell your equities (because you think the market is overvalued)? This is the world many Bogleheads are in, don't assume we can all just sell our equities in a 401k without any tax consequences, that simply isn't the case for many of us.
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FIby45
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Re: Irrational Exuberance- Is completely ignoring all external signals (p/e) and auto-investing monthly ever a bad idea?

Post by FIby45 »

firebirdparts wrote: Mon Sep 14, 2020 4:08 pm
rascott wrote: Sat Sep 12, 2020 9:54 am P/Es are only relevant when adjusted for underlying interest rates. For all we know 30x may well be the "norm" for decades..... if interest rates are going to stay sub-1%.
This is super important, but it seems like it’s not a very popular topic of conversation.

To the OPs question, I don’t think it can break, but if interest rates rise, the present value of all future cash flows through will fall. It’s fundamental. The question is really a question about dealing with sequence of returns. If you just accept that you can act on what is knowable, then you’d have a portfolio based on that and you wouldn’t hesitate to put money in that portfolio.
Okay. Makes sense. But I think I heard interest rates were like 6% for dot.com bust.

What do you do in that situation?
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