One of the most common questions we're hearing lately is some version of:
"The market seems expensive... shouldn't we be worried?"
It's a fair question.
After all, when we shop for almost anything else, cars, homes, airline tickets, even a pair of shoes, we prefer lower prices to higher ones. Nobody walks into Costco, sees the price go up, and says, "Perfect. I'll take two."
Yet investing has always been a little different.
Today, many measures suggest that stocks are trading above their historical average valuations. That doesn't mean investors should ignore valuations—they matter. But it does mean we should be careful about the conclusions we draw from them.
One of the biggest misconceptions in investing is that expensive markets automatically lead to imminent market crashes.
Unfortunately (or perhaps fortunately), the market doesn't work that neatly.
High valuations can influence the returns investors may earn over long periods of time. What they have historically not done very well is tell us what will happen next month, next quarter, or even next year.
If they did, investing would be a lot easier.
And many television networks would have significantly fewer people employed.
History is full of examples of great companies that rarely looked cheap. Investors have spent decades arguing that companies like Apple, Microsoft, and Costco were overpriced. Sometimes they were. But many times, those businesses simply kept growing, increasing their earnings, expanding their markets, and proving the skeptics wrong.
The challenge is that great businesses often look expensive precisely because they're great businesses.
Waiting for the "perfect" price can sometimes feel like standing on the beach waiting for the perfect wave. It sounds sensible until you realize everyone else is already surfing.
This doesn't mean we ignore valuations or throw caution to the wind. Far from it.
Instead, we focus our energy on the things we can actually control.
Those include:
- Maintaining an appropriate asset allocation
- Diversifying across investments and asset classes
- Managing taxes efficiently
- Rebalancing when markets create opportunities
- Aligning portfolios with long-term goals
- Making sure cash is available for near-term spending needs
These are the decisions that consistently add value regardless of whether markets are cheap, expensive, or somewhere in between.
The reality is that investors who have sold solely because the market looked "too expensive" have often been surprised by how long expensive markets can remain expensive. Markets don't ring a bell when valuations get too high. They don't send a courtesy email before a correction. And they certainly don't check with us first.
What successful investors have done throughout history is remain disciplined, stay diversified, and avoid making large portfolio decisions based on predictions that are, at best, uncertain.
So, do valuations matter?
Absolutely.
Do they tell us when the next correction will occur?
Not really.
Valuations help shape expectations, but they are not a market-timing tool. That's why our focus remains on building portfolios that can navigate a wide range of market environments rather than trying to predict exactly when sentiment will change.
As the saying goes, the market can remain expensive longer than investors expect. Fortunately, long-term investors possess an advantage that short-term traders can never buy: time.
And time, unlike stock valuations, has an excellent long-term track record.
As always, if you have questions about your portfolio or financial plan, we're happy to talk.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All investing involves risk, including possible loss of principal.
No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk.
