I fully admit that I did the wrong thing back in 2008 when the stock market got walloped. I had only been investing for about 10 years and I freaked out:
I logged into my 401(k) account late one night and lowered my contributions so that I put in exactly enough to get the company match and no more. For the next couple of years, I paid no attention to my investment accounts. The latter decision, not to look at my accounts, was actually wise. Dead people are great investors. The first decision to stop investing was very, very bad.
The Store Is On Sale
One of my favorite investing quotes is this one from Warren Buffett:
The stock market is the only store that people run for the exits when everything is on sale.
My mistake has cost me hundreds of thousands of dollars so far. By the time I die, it will most like have cost me millions. But, I had to go through the storm and make the mistake to learn.
Now, I’m better.
I’m not a market timer. Not much of one anyway. However, when Mr. Market is really naughty, if I have any spare cash lying around, I send it to the front lines. Buy! Buy!! Buy!!!
So, it makes me a little sad when I see comments like this online (I changed the wording a little because I don’t want to call anyone out specifically):
I just can’t take this anymore. I keep contributing to my 401k and it keeps going down. I’m stopping my contributions until this sh*t changes. When will it stop going down?
The Right Question
The commentor is asking the wrong question:
When will it stop going down?
Before I tell you what the right question is, consider this chart:
The chart above shows the PE ratio of the S&P 500. The higher the number, the more overvalued the stock market is. Here’s some more data:
So, the historical mean PE is 15.97 and even after recent tantrums, Mr. Market is still at an exhuberent PE of 20.34.
The anonymous human above complained about their 401(k) going down. But the way I see it, we’re lucky to be where we’re at. Europe is at war. Inflation. Political strife. All sorts of sh*tburgers and Mr. Market is still overvalued.
Perhaps the correct question is this:
Why was Mr. Market so inflated in the first place?
In a time of cheap money (low interest rates), the dollars had nowhere else to go. Mr. Market was artificially pumped up. Now that money is getting more expensive, dollars are flowing out of stocks. It’s the natural flow of things. The pendulum has stopped and is now swinging in the other direction.
This thought puts me at peace. Mr. Market is reverting back to the mean.
Don’t Worry, Be Happy
When I consider my investments, it helps me to focus on the business, not the stock price. Would you rather have:
- A company that’s knocking it out of the park, but with a depressed stock price due to macroeconomic factors.
- A company that’s moping along, but with an inflated stock price due to an external factor like low interest rates or hype.
Of course, the right answer is the first one. Over the long term, a stock price will reflect the real value of the company. Over the short term though, it’s often tainted by whatever happens to be going on in the world at the moment.
And if the thought of further losses doesn’t make you happy, know that time cures all. The war will end. Inflation will settle down. Mr. Market will eventually continue the climb upwards.
Stay the course.
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You mentioned 2008, but your chart graphic points to 2018..? Wondering if I missed something.
Whoops, fixed! Thanks for catching!
Once the S&P dropped to roughly 20% off it’s high I upped my equity ratio by 10%. Even though I know that it’s wise to buy when stocks are on sale, it’s still hard to see the market keep dropping…But you’re right, this too shall pass, the markets are overvalued, inflation will eventually go back to normal, and all will be right with the world!
Back in September when p/e ratio was getting a bit crazy I continued investing 15% into index funds, but put a lot of extra into my mortgage. Now I’m reversing and buying either low p/e value stocks and increased my index fund contribution.
While I don’t think pick all my stocks perfectly. I do think (and this far) done better than Mr. Market.
Note: I still hold 75% in index funds, 5% hand selected stocks, and 20% in cash in constant search for companies on sale.
But Mister Fifteen Hundred Days, your investments have tanked three quarters of a million since January 1. How can you be so blasé abo-
Heh, I couldn’t even finish. Thanks for helping your readers keep a steady hand on the tiller!
Great graphs (and actual photo of you). Thank you for bringing a different prospective on current market. I did not know we can see the the P/E ratio for S&P500. This graph is helpful when you want to know if it’s overvalued. Sometimes we need to zoom out to see things correctly. Thank you again for a wonderful blog and update.
Stay the course, but she’s going to be rocky indeed! Just remember the “E” in the P/E ratio is the one to keep an eye one. Stocks are still expensive now with earnings sky high and there’s going to be a lot of room to fall when the obligatory recession starts and inflation continues to bite into profitability. So the markets could fall 50-60% to have the PE ratios back at historical norms with lower earnings factored in.
This too shall pass though, if we early retirees are screwed it essentially means this time it was different (eventually that will happen, history shows us that all empires fall), but I don’t believe that’s the case here.
Carl – love your blog and podcast. This was a delightful post.
FYI – a typo here: 1/1/22 (8 Yrs Later): $4,762,642 [change 8 to 9] years later
Frankie!
Thank you for alerting me to the typo and for the kind comment!
I hope that your 2022 is the best ever!
I found this chart interesting: https://www.columbiathreadneedleus.com/blog/chart-understanding-the-relationship-between-rates-and-p-e-ratios
Current P/E’s are still slightly expensive, but are certainly more reasonable given the interest rate environment.
Maybe it’s just human nature, but I feel like it’s very natural for people to frequently think “this situation is different”, and to not apply principles that have worked for decades.
For instance, as I’ve learned more about the US dollar’s potential to become worthless because of limitless supply and irresponsible printing of money, I tend to think that the clock is ticking for the dollar to become worthless, which seems like it will have a devastating effect upon stocks.
I’ve pulled my retirement out of the stock market and am using it to buy land (and some crypto, which has turned out to be risky for now).
Maybe I’ll have the same regrets you did about stopping your regular 401(k) contributions, but for some reason it just seems like the safest thing to do.
I guess we’ll see soon enough.