Would I Invest in the U.S. Stock Market at Current Price Levels?

andrew hallam

andrew hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use.

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12 Responses

  1. Adam says:

    I've been getting the S&P 500 PE ratio from this site that shows a value over 18.. http://www.multpl.com/table
    I wonder why there is such a big discrepancy between different sources?

    • Adam,

      I listed the S&P 500's trailing price to earnings ratio at 18.35, as of March 29, 2013. There's no discrepancy between that figure and the one you sourced. You probably just read my post too quickly. There's something called a trailing PE ratio and a forward PE ratio, as mentioned above. The trailing PE is the truth, and the forward looking PE is the projection based on next year's projected earnings.

      Cheers,

      Andrew

  2. adam says:

    Doh! thanks Andrew. I always learn something from your posts.

  3. Stig says:

    Andrew,

    I can see Adam's confusion with your recent post.

    In the post, you state: "You can check it by visiting any number of stock market websites. Trying Yahoo finance reveals (as I write) a PE ratio of 14 times forward earnings for the S&P 500." If you follow the link provided, the P/E listed is for "ttm" (trailing twelve months) and not forward earnings as stated in your post.

    If you go to Vanguard and look up the P/E for VOO (S&P) and VTI the P/Es that are listed (as of February 28/13) are 16.5 and17.4 respectively.

    At any rate, the main point is the trailing P/Es are not cheap as in recent times, yet they certainly are not in nose-bleed territory given historical averages/highs.

    Enjoy your posts.

    Todd

  4. Blues says:

    Hi Andrew

    Thanks for all your knowledge sharing. I have actually read your book more than 9 months ago and liked it very much. However, I did not take any action hoping that the price will go down (the speculator in me!). Unfortunately, prices continued to trend up since then!

    This article serves as a timely reminder and I finally took action! I sold my limited US shareholdings and went into the Vanguard funds. Tomorrow, I will clear some of my SG shares and go into STI ETF. I still do not have the guts to go "ALL IN" as mentioned by you, but I will plan to add to the portfolio every month.

    My intended portfolio is as follow:

    VTI 20%

    VXUS 20%

    STI 20%

    Bond 30%

    Commodities 10%

    I still cannot find a suitable low-cost ETF for commodities. If you or any of your readers have any idea, I appreciate the sharing of information.

    Ok, a bit of over exuberance for finally taking action. Thanks again for your fantastic website and book, and keep up the good work!

    Cheers

  5. Student of Investmen says:

    Andrew,

    Good article. I do have a few points that you may wish to consider when we use P/E ratio. First, I think P/E ratio should be used in the context of the overall economy. A P/E ratio of 22x in 2000 is due to the tech bubble that drove market sentiments way off their fundamentals. Then if I were to invest I would place a discount to the numbers, which is a matter of judgement rather than calculation.

    Second, we all advocate a global exposure to investing. I wonder if this numbers are still relevant for comparison with other stock indices like Singapore.

    Wonder what's your take on it

    Student of Investment

    • Hi Student,

      To be honest, I don't really think too much about what markets are expensive and what markets are cheap. By globally rebalancing a diversified portfolio, I'll never really get too caught up in a bubble. I'll sell rising asset classes to buy dropping ones over time. I think that's the best approach of all: establish a goal allocation and stick to it. It prevents any kind of speculation, and always allows you (quite mechanically) to be a little bit greedy when others are fearful and vice versa.

      Cheers,

      Andrew

      • Student of Investmen says:

        wise words indeed.. prudent asset allocation prevents you from speculation. Thanks for writing this post. Looking forward to more in future.

  6. Manny Katz says:

    I have not been an investor most of my life. I'm now 75 and have low six figures just in cash and money market funds. A real estate loan is about to be paid off in part giving me lots of cash that I don't really want because of the tax bite. I've read your book as well as one by Dan Solin also an advocate of indexed funds. Would it really be wise to make a lump sum investment in a market which is at an all time high? You have pointed out in other posts that lump sum investments don't do so well. Your advice also hinges on one's willingness to invest in companies that are socially and environmentally irresponsible or even criminal, ala Wall Street.

    • Hi Manny,

      Are salaries at an all-time high? Based on your assessment of the market, you might suggest they are. However, we both know that salaries were higher fifteen and twenty years ago, based on an adjustment for inflation. When we measure stock markets, we need to measure them based on their relative level to earnings. Markets are at half the level they were at in 2000. Likewise, when we measure the prices of houses, we need to measure them based on how cheap or expensive they are, compared to median levels of income. Based on your rationale about the markets (extending to housing) you might suggest that houses are more expensive today (in the U.S.) than they were in 1988. But of course, houses are cheaper today than they were in 1988, relative to median incomes.

      I didn't know that I wrote about lump sum investments being a bad thing. Studies have shown that lump sum investments may be tougher emotionally, when markets fluctuate, but they are more profitable, generally, than dollar cost averaging. It's true what you say about capitalism though. If you dig, and measure any company by a moral standard, most will fail. I say that, because a moral standard for one person won't be the same as a moral standard for the next person.

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