So it's no secret that on the back of the Magnificent
Seven, all this hype around AI, the stock market
has gotten pretty darn expensive. Now, of course,
we can argue that point depending on whether
you're a growth investor or a value investor.
But just objectively, we're currently staring
down the barrel of a Shiller PE of around 35.
And that's roughly double what the historical
average is. And what that means is that investors
right now who are buying into the market are
willing to pay 35 times the earnings of the stock
market just to own it. If you rewind back to
2009, for example, after the GFC, investors that
were scared out of their wits were only willing
to fork out 14 times the earnings. Now, there's
probably an argument to be made that the historical
average doesn't quite apply to modern times,
but still having a look at the Shiller P, it
seems reasonably obvious that 35 is still pretty
high. In fact, it's the third highest point in
history. three behind 2021 and 1999. And we all
know what happened in both of those occasions,
but this begs the question, if you're a passive
investor, that being someone who just buys index
funds, what do you do? Is it a wise idea to still
be putting lots of money into the market when
it's clearly quite high? Is it better to reduce
the amount of money you're regularly investing
or even stop until the market and the Shiller
P normalizes a little bit? Well, that's what
I want to cover in this video. And to help answer
those questions, I want to introduce this guy.
He's the grandfather of passive investing, Mr.
Jack Bogle. And the reason why you might know
him is because he is the founder of the Vanguard
Group. It's kind of sad when we talk about great
investors of history. We talk about Ben Graham
and Warren Buffett and Charlie Munger and so
on. But Jack Bogle rarely gets a mention. However,
truth be told, he is probably responsible for
more wealth generation around the world than
any other investor. He sadly passed away in 2019,
but all throughout his life, he was a huge ambassador
for simply tracking the market. Market. And what's
interesting is back in 1997, as the stock market
was forming into one of its biggest ever bubbles,
Jack actually gave a speech on investing during
overvalued markets. And to be honest, it's kind
of crazy how well that lines up to today's conditions.
In short, it seems to me that speculation betting
on higher and higher valuations is in the driver's
seat. Investment betting on the fundamentals
of dividend yields and earnings growth is in
the back seat, probably even in the rumble seat.
But when speculation drives stock returns in
the short run, while it drives stocks returns
in the short run, the crystal clear lesson of
history, at least for the past 200 years, that
in the long run, fundamentals drive returns.
And just like you were seeing in the run -up
to the tech bubble, we too face a situation today
where a lot of the stock returns we're seeing
are based on speculation as opposed to fundamentals.
I mean... We've seen the Magnificent 7 rise to
incredible valuations based on a future promise
that we're unsure will eventuate. We're seeing
Meta and Google at a PE of 27, Apple at 29, Microsoft
at 37, Tesla at 45, Amazon at 50, and Nvidia
at 62. But as Jack notes, in the long run, it's
always the fundamentals that drive returns. So
that leaves us with two possible outcomes. A
world where AI lives up to the hype and earnings
rise to justify the new valuations or situation
where AI fails to deliver in which these big
stocks that support the market. get repriced.
And funnily enough, that's basically the exact
point Jack talks about in this next clip. So
that tension has to be resolved. Let me give
you two extreme possibilities. One, a market
drop of 35%. This would lower price earnings
ratio to a more NOR ratios to a more NOR normal
level of about 13 times. This is hardly a doomsday
scenario. Two, we're in a new era in which stock
returns average 15%. In short, a new era of boom
times and high valuations that would justify
today's price levels. Now, of course, it could
happen, but I wouldn't bet the ranch on it. The
US stock market, however, seems to be betting
the ranch on it. It's priced, I think, for the
best of times and only for the best of times.
Is this speech actually from 1997? It's actually
a little bit scary how well all of that lines
up to what we see today. And I think many investors
would agree with Jack's statement today. The
stock market is pricing in the best of times
and only the best of times. And while the best
of times may eventuate, Jack certainly wouldn't
go betting the ranch on it, but with that said,
that obviously makes it a lot harder psychologically
to put money into the market right now. Right.
For example, I am in part a passive investor
and in part an active investor. But when it comes
time to add more money into my chosen ETFs or
my dollar cost averaging plan, I can see I win
on bike eat down. I always have this grimace
when the market is at all time highs. There's
just something about it. It just does. feel great
sinking a lot of money into your long -term investments
when you kind of know in the back of your mind
that the market is pretty expensive. It's kind
of like paying full price for a bit of furniture
a few weeks before Black Friday. You feel bad
paying full price knowing a sale will likely
come along in the not too distant future. So
with that set up that leads us to the question
should we actually be buying our market tracking
ETFs when the market is at all time highs. Should
we try and time the market just a little bit
in this case? Well, this is what Jack had to
say all the way back in 2001. I don't know anybody
who has ever been successful in timing the market.
I don't even know anybody who knows anybody who
has ever been successful in timing the market.
So if you want the short answer, no. You should
not at all deviate from your passive investing
strategy just because market conditions have
changed in the same way that you wouldn't sell
your investments if, all of a sudden, the market
fell 30 % tomorrow. As Buffett would say, our
favorite holding period is forever. Forever.
The more you start messing around with your market
tracking investments, the higher the probability
that you'll lose. And that's quite literal. A
study way back in 2000 studied 66 ,565 households
during 1991 to 1996 and found that those that
trade most earned an annual return of 11 .4 %
while the market returned 17 .9 % annually. The
truth of the matter is if you start messing around
with your portfolio you will likely lose out.
Last month on Lewis Rukeyser, you summed up your
investment philosophy as buy everything and hold
it forever. Do you still subscribe to that in,
in light of what the market has been doing or
would you unload some things now? No, my theory
is not subject to the ups and downs, the peregrinations
of the stock market. It's painful to do, but
I think the idea of owning the stock market is
the best approach to equity investing. And perhaps
I didn't make that thoroughly clear there. And
while Jack is, of course, a little bit biased
on the topic, He's not wrong. The idea of dollar
cost averaging into low cost index funds that
tracks, say, the S &P 500 and then consistently
buying them and holding them over a long period
of time and never selling. has proven to be an
exceptionally successful strategy over recent
history. I mean, since 1957, which is the year
that the S &P 500 adopted its 500 stock structure,
while that index has returned an average of 10
% per annum, that's a phenomenal long -term return
considering what you might get elsewhere in,
say, savings accounts, gold or bonds. And I will
say, despite it feeling painful to buy the market
when it's visibly high, remember there is actually
an inbuilt mechanism into the dollar cost averaging
strategy that protects investors against really
high prices. Remember the dollar cost averaging
strategy, which is the approach implemented by
almost all passive investors. is the process
of buying a fixed dollar amount of shares in
a low cost market tracking index fund and then
repeating that purchase at fixed time intervals
over the course of your investing career. For
example, you might choose to invest $1 ,000 every
three months and as the quarters go by, you just
keep showing up. Well, as I said, this has an
inbuilt mechanism to protect you when the market
is high. Say the market crashes and the ETF shares
you're looking at buying are now $100 each. Well,
in that case, with your $1 ,000, you'll buy 10
shares. But then what if the market goes on a
rampage and the ETF shares are soon worth $200?
Well, guess what? Now that the market is expensive,
you're only gonna buy five shares. When the market
is high, the strategy keeps your buying low,
and when it's cheap, you're naturally going to
load up the truck. It's genius. So no, at high
prices, you should not abandon your tried and
true passive investing strategy. It's much more
important to stay in the habit of constantly
investing, just showing up rain, hail, or shine.
If you are not a speculative investor, if you're
a long -term investor and yet there are these
speculative investors buffeting your returns
about, what should your reaction be? Should you
be doing anything differently? I think basically
you should not be doing anything differently.
I mean investment is a pretty simple thing. Investment
is owning businesses or I would say being an
inveterate index fund person, owning all American
business, owning every company in America, America
letting capitalism do its work. Those companies
will grow at probably around seven percent a
year. They'll pay you at about a two and a half
somewhat lower than history, but a two point
five percent dividend yield. And that should
over time bail you out of anything that happens
because of the the wild swings. I mean, if you
visualize investment as growing in kind of a
steady line, which it does, and visualize the
crazy market as being all these jags up and down
around the steady line upward, upward, always
upward, I think, then you've got to say, I know
I'm not smart enough to get out the high. I know
I'm not smart enough to get back in at the low,
so I'm just going to stay the course as we would
say at Vanguard and hang on through all that.
And importantly, if I'm trying to accumulate
money for retirement or to buy a home or to educate
my children, what you want to do is keep investing.
Keep investing rain, hail, or shine. Passive
investors are better off if they just keep going
without messing with their strategy. But there
is one key to actually putting this theory into
practice, and this gets glossed over a lot because
it's not as glamorous as showing a compounding
chart or talking about how soon you could be
a millionaire. And the point is finding the right
plan for you. You. While we know we buy the market
and we buy it consistently, it's really important
that you actually nail down your plan into hard
numbers. What's your current savings rate? What
percentage are you willing to devote to investing?
How much money will that mean that you save each
fortnight? How frequently are you going to invest
that money? How do you make sure you won't fall
off the train? As Jack is about to discuss, you
We need to really nail down an achievable plan
for you to ensure you can implement this strategy
over the long term for yourself. But I think
the idea of buying and holding forever and not
trying to make adjustments requires that you
buy. gotten it right in the first place. You
can only hold tight if you bought right, if you
will. And that is to say, have an asset allocation
that has something to do with how many years
you have to accumulate money, how much resources
you have at stake, how much income you need,
and how much courage you have to ride out the
peregrinations of the market. So you've got to
take all that into account from that simple statement.
And I know it sounds boring, but in my experience,
You really do have to come up with a plan that
works for you specifically to be able to execute
the strategy successfully over a long period
of time. of time. As Jack spoke about in the
clip, you have to understand how much you can
comfortably set aside for investing without something
coming up that could force you to sell your investments.
You have to know how long you plan to be in the
market. For example, you wouldn't be dumping
large sums into an overvalued market if you're
looking to retire in two years. And then from
there, you also have to know yourself. How comfortable
are you having money at stake? If you're someone
who frequently stresses about your investments
and has a tendency to make snap decisions, then
maybe the stock market isn't for you. Maybe you
might prefer government bonds or perhaps paying
down your mortgage instead. A lot of times with
passive investing, the investor is their own
worst enemy. So I'm bum. Why? Dial from bar cell.
I'm definitely big on setting up a plan that
genuinely works for you that isn't stressful
to continue with. Ultimately, for this strategy
to work, you need to set aside money that you
won't need to touch for decades. You need to
invest often. And you mustn't be tempted into
messing around with your portfolio. So you need
to understand what amount you can easily set
aside, what investing schedule you can stick
to. And you need to mentally commit to the long
term to ensure you don't end up as just another
failed investor. Remember that stat from before.
The study showed the more you mess around with
your investments, the more likely you are to
lose. But if you're relatively young, if you
are investing money that you don't need, and
you're properly spread across the market through
something like a market tracking index fund,
then you can be reasonably confident, as Jack
says, that you've bought right. So that's the
deal with index funds when the market is at all
time highs. Now, if you're interested in getting
the full breakdown and simple, step -by -step
manner, definitely check out Stock Market Investing
for Beginners over on New Money Education. That
is a full, in -depth course that will get you
up to speed on the passive investing strategy,
no matter where you are in the world. So, big
thanks to everyone as well who has supported
the courses too, as they are the main way that
we fund this YouTube channel. But apart from
that, Please do leave a like if you enjoyed the
video guys, subscribe if you've made it this
far and you'd like to see more videos similar
to this and I'll see you guys in the next one.
This is Higanchi, see you block giants.