Quiz any random group of investors, and you are likely to hear that the stock market is overvalued. Contrarians, convinced that the crowd is often wrong, will tack away from the popular view. But sometimes, the crowd is right. This is likely one of those times. By most accepted measures, the market is rich relative to historical norms.
This presents a psychological dilemma for long-term investors. Should they forge ahead despite the belief that stocks are expensive, or should they wait for a selloff before committing their capital? And if already fully invested, should they stay put or bail out now to avoid the inevitable correction that seems always to lurk just around the next corner?
Most investors by now actually know the right answer. Given the wealth of information available on financial media and the internet, the futility of trying to time the market is widely accepted. And yet many of us still try, against our better judgment and despite previous lessons learned. But for this potent human trait, Las Vegas would still be a forlorn way station.
It is far more important to calibrate expectations and focus on things that are controllable, like asset allocation and risk management, and allow Father Time to work his magic.
Christopher HopkinsSetting reasonable expectations should include reducing our expectation for stock market growth over the next few years. Markets run in cycles, with valuations peaking and then overcorrecting. This phenomenon, often referred to as “reversion to the mean,” simply implies that stock prices fluctuate about the average over what can be very long cycles.