Smaller investors especially need to be aware of the possible warning signals experienced investors track in the current market. The valuation of the U.S. stock market right now is among the most obvious signs we could be approaching a turning point. Based on data going back over 150 years, the market is currently trading at a price-to-earnings ratio of 28x, ranking in the top 10% of all the most expensive markets ever recorded. This calls for questions regarding the future returns of the market, not only numbers on a screen. Forecasting only a 1% annual return over the next ten years, including dividends, the generally accepted Shiller P/E ratio indicates that future returns might be significantly lower than many hope. This begs a crucial issue for investors: how can you guard your portfolio against such high valuations?
The Importance Of Valuations
