Are you concerned by the current investing climate?

Ray_Singh-Blue

One one hand I agree with the 2 posts before Bowlehead99's. But on the other hand, "Market timing loses money" feels like an orthodoxy which shouldn't be beyond challenge.

What if the FTSE100 suddenly shot up to 20,000 with an average dividend yield of 0.5% and an average PE of 100. Would you still invest?

grey_gym_sock

Ray_Singh-Blue wrote: »

One one hand I agree with the 2 posts before Bowlehead99's. But on the other hand, "Market timing loses money" feels like an orthodoxy which shouldn't be beyond challenge.

What if the FTSE100 suddenly shot up to 20,000 with an average dividend yield of 0.5% and an average PE of 100. Would you still invest?

that's perhaps why it tends to go up more gradually. you might think a PE ratio in the 20s is reasonable, and then it goes over 30, which seems high. but after a while, a PE in the 30s starts to seem normal, and then it goes over 40. and so on.

IMHO, extreme valuations do matter. if the PE is twice a normal value (whatever that is), then expected returns are signicantly lower, and there is good case for at least reducing your equities (or switching some to less overheated markets, or to cheaper subsets of the market).

but if you think the PE is perhaps 20% too high, IMHO there's a good case for ignoring that. there may well be good reasons for a high valuation. e.g. perhaps the USA has a higher valuation because it's nearer to recovering from the financial crisis than other economies. and even if it is overvalued, that can persist for a long time. you could be waiting for a correction for years. a small correction won't compensate you for being stuck with the low returns of cash for years.

if you think there are small relative over-/under-valuations, you could just shift your portfolio a small amount, putting more in whatever is under-valued. that won't do you much harm. but it also won't gain you much.

i don't think equity markets are extremely overvalued at the moment. so not especially worried about them.

System

What if the FTSE100 suddenly shot up to 20,000 with an average dividend yield of 0.5% and an average PE of 100. Would you still invest?

If that was unusual at the time compared to the s&p500 etc and if I didn't have a really long term outlook (I.e. I could afford opportunity cost) then I suppose I'd sell but the boundaries of 'normal' are getting continuously pushed

Its not likely though to just do that for no reason whatsoever, the amount of money being invested in the markets increasing is why I think we've seen PE rise and its more a question of whether the total amount of money getting put into markets is likely to change. - think, with gilts low yielding where else other than equities are pensions likely to go?

You may see withdrawal from the markets as baby boomers retire, but I suppose if they buy an annuity, the annuity company would buy equities

coyrls

MatthewAinsworth wrote: »

You may see withdrawal from the markets as baby boomers retire, but I suppose if they buy an annuity, the annuity company would buy equities

Annuities are not funded by equities but by gilts, hence the low return.

Biggles

Ray_Singh-Blue wrote: »

What if the FTSE100 suddenly shot up to 20,000 with an average dividend yield of 0.5% and an average PE of 100. Would you still invest?

I'm afraid I'd be too busy spending my profits.

JohnRo

MatthewAinsworth wrote: »

Just ride crashes out, don't worry about them

Or perhaps plan for them to some extent and then capitalise, at least partially, when the opportunity presents. I don't mean sit it out, that would be silly, but whilst in the market, also build up an opportunity chest alongside.

Diversification doesn't just mean a portfolio of diverse stocks and bonds from different classifications and parts of the world.

I plan to maintain a 10-15% proportion of investment wealth in liquid fixed interest cash / P2P with a view to utilising some or all of that as and when, or if, the time ever comes.

System

Johnro - I was thinking along those lines (liquid fund to size opportunity) but the money in that fund is incurring an opportunity cost for not being in equities - essentially what you're saying is to attempt to time the market, but historically most attempts underperform buy and hold - opportunity cost and the difficulty in judging a crash and then beating the day traders to it

I just reserve my credit ability for crashes, even then you could say that I'd usually do better just whacking it in now

System

You might think a crash is imminent and that shares will definitely be cheaper than present, but if it didn't actually happen for another 3 or 4 years you might find that the at-crash prices and the dividends you've forsaken over the years are more expensive than if you just bought now.
Traditionally humans can't time the market to beat buy&hold

JohnRo

A 100% gain is wiped out by a 50% crash. I'm prepared to forego the slight drag on potential performance that holding a small war chest in reserve inflicts.

I've managed it with BRWM and PEW without any strain and it's quite obvious when the time comes what opportunities are there for the taking that significantly reduce book costs. BIST is looking like the next candidate but there are a few concerns there I haven't reconciled yet, like whether I even want it any more given the ineptitude of the manager.

Being mostly in the equity market and having a mechanism in place that allows me to take advantage of relatively simple opportunities like that is a very different proposition to sitting entirely on the sidelines in other risk assets or cash, gambling they'll do better, while waiting for the perfect storm in the equity market .

System

If you believe you can time it then great

A 100% gain is wiped out by a 50% crash.

Usually that gain is recovered fairly quickly in the upswing - and after a crash there is usually an appetite for an upswing as everything is undervalued. Its not a real loss until you sell it, just a paper one, which I think is a key psychological difference between timers and buy&holders - timers tend to think the losses are more permanent, they don't have the same degree of faith in a general trend upwards that holders have

I will take on bonds when i m near drawdown, when volatility matters most
I don't plan on selling any time before