Such a great post, causing a slew of what ifs in my mind. Don't we all, at least, wish we knew when to fold? OTOH, what would happen if someone actually could recognize extreme overvaluation, reported it and most investors believed and acted on it?Dandy wrote: ↑Mon Jun 18, 2018 9:58 amFirst I am not making any case the current markets are overvalued or extremely overvalued. Just that the topic needs to be explored in more detail than essentially being dismissed with a few words of guidance.The problem with market timing at valuation extremes are the "being right too early" problem that I posted about earlier and also the definition of "extreme valuations."
There is a risk for "being early" and there is a risk in being late. The stage of live, the risk tolerance you think you have, and your investment goal e.g. growth vs asset preservation, etc. come into play as to which risk -- early or late is a bigger concern. For quite some time my goal has been asset preservation thus a rather modest equity allocation of 43%. If I was in my 30's or 40's I would still have growth as a goal and not want to be "early" I'd take a risk since I would have sufficient human capital to still reach my goals.
Jack, near retirement age (and in questionable health) reduced his equity allocation by 15 or 20% e.g. from say 70% to 50%. That is a major change. It turned out to be a great call. I don't expect any more detailed research, analysis etc to be right all the time. But, as valuations rise risk likely rises also - we need better information of when that rise in risk is becoming a problem that normal rebalancing isn't necessarily enough. Agreed it will not be with a very high degree of certainty. And we need that general guidance from a trusted source based on some reasonable analysis not from some media hype/analyst.
I agree this is not an easy task and may be relatively impossible. But, Mr. Bogle blessed it in rare occasions and I think it needs more analysis/discussion. Otherwise it seems we will only recognize extreme overvaluation after the fact when many have lost a significant amount.
Anyway, like you said, not easy and relatively impossible but interesting to discuss.
BTW, being a retiree like you, I did the only thing I could to protect myself by reducing my equity allocation at a time I thought the market had significant downside risk.