Everywhere I turn the media, the “experts” and social media posts are telling me that the stock market is over priced and now is not the time to invest. They’re saying the price to earning ratio (P/E) is too high!

People read this in the press, they look at what’s being said online and then they keep their money on the side lines waiting for the price of stocks and shares to come down. Or worse than that we have had several posts this week in the RFS Facebook group about selling off shares and going into bonds instead! Is this a good strategy? Is the market overpriced?

Are you scared to invest your money because of this? Has all this media hype and commentary affected you?

In early 2016 Katie and I were doing really well in our jobs. We were earning lots of money but we weren’t investing it.

We were scared. What if Trump gets in? What if Brexit happens? People told us “the market is going to tank, it is overvalued at the moment”.

So we kept our cash, we didn’t invest it and missed out on a huge increase in stock market value. You can read the full story here in Just Start.

2015/16 was the first time I heard the story that the stock market is overpriced or overvalued.

Katie and I have been on the great PIE tour of New Zealand meeting all the amazing Kiwis that have come on Rebel Finance School.

In one of the meetups I heard a familiar story. A wonderful lady told me that she had not benefitted from the Trump Bump (the increase in the values of stocks and shares after Donald Trump was elected in 2024). She had kept her cash because she was scared to invest.

I held my head in my hands thinking “didn’t you hear me tell this exact same story on the Rebel Finance School course of what happened in 2016?”

I felt bad because this lady had missed out on thousands of dollars at a minimum, maybe tens of thousands of dollars. The same stories seem to repeat themselves.

Has anyone told you the story that the stock market is overvalued or over priced. Did you hear it in the media? Do you know what this means?

It means that they (whoever is selling the story) think the price you will pay for a share in the companies in the market is higher than they think it should be.

The idea behind this commentary is that they know when the market is going to fall and then can buy when it is cheaper. The question then becomes are they wise to wait? Is it really over priced? Is this a good investment strategy?

There are so many stories I hear from people when they explain to me the stock market is overvalued. Here are some of the most plausible that might sway you…

1. High Price-to-Earnings (P/E) Ratios

What people are saying…

The P/E ratio of the market is significantly above its historical average.

For example, the S&P 500’s P/E ratio is around 24.77, which is higher than its longer-term average of about 19.

This means that the market is going to crash so that the P/E ratio can come down to what it “should be”.

Alan’s de-jargoning…

Firstly, what does P/E ratio mean?

P/E ratio or price to earnings ratio is the share price divided by the earnings (dividends).

If the share you own earns £10 in dividends and the share price is £50, you have a price to earnings ratio of 5 (50 divided by 10).

It’s a way to measure how much people are willing to pay for future profits.

Alan’s thoughts…

If you invest in index funds you don’t really need to know this but people like to tell you about it to prove their point that the market is over valued. Value investing was taught in Benjamin Graham’s book The Intelligent Investor which was all about stock picking.

It was published in 1949 and there weren’t index funds them. You had no choice but to pick stocks.

The method Katie and I use for investing is to ignore this noise and invest in the total stock market. A simple global index fund which has always gone up over time.

This is the same message that people have been using to say the stock market is overpriced for decades. If I had listened to them I wouldn’t have invested my money and I wouldn’t be Financial Free right now. So I have learnt to tune this message out because it is about timing the market and how you can use data to do so.

The evidence over the decades suggests that no one can time the market.

2. Market Hype and Speculation

What people are saying…

Investor enthusiasm, particularly around certain sectors like technology, has driven stock prices up. This hype often leads to prices that aren’t supported by the underlying financials.

Alan’s de-jargoning…

Firstly, what does “underlying financials” mean. This means the healthiness and profitability of the company. What it owns, what its product is, how good the team is, how much profit it’s making, how much cash it has in the bank etc.

This message is saying that the company is worth “too” much compared to it fundamentals.

Alan’s thoughts…

This is a super subjective message. Imagine if you lined up 50 people in front of a property and got each of them to tell you how much that property is worth?

How many different answers would you get? Probably 50. Everyone has a different idea of what something is worth or not based on their experiences, biases and desires.

The story that the market is overhyped has a grain of truth to it because when people are feeling confident they invest away and prices surge. When they feel fearful everyone sells and prices collapse even if the underlying fundamentals of the business (profit, product, team etc.) haven’t changed! Hype and confidence do affect the price of stocks and shares.

But does this mean you should hold cash on the side lines? Can anyone really tell if the market is overhyped and is going to crash?

No one can predict this so we just come back to put your money in the market, invest and over the long term it will go up.

3. Concentration in Mega-Cap Stocks

What people are saying…

A few large tech companies, often referred to as the “Magnificent Seven,” have a disproportionate impact on market performance. Their high valuations can skew the overall market valuation. The story goes that you shouldn’t have your money in such a concentrated way in Apple, Nvidia, Facebook, Google etc.

Alan’s thoughts…

I want my money split between those companies in proportion to the size they are in the market because they are valued that way as they make amazing profits.

Why would I not want my money invested in these incredibly profitable businesses that are generating huge returns?

This argument again comes back to stock picking and the fact that who ever says this can read the future. They are saying these businesses are overpriced therefor you shouldn’t invest something and you should “pick” something else.

Our strategy is to not pick but to buy the whole market through a global index fund as we know we can’t predict or time the market. I want my money invested in proportion to how valuable the companies are. I want a large amount of my money invested in Apple, Facebook etc. as they generate incredible returns.

4. Low Earnings Yields

What people are saying…

With high stock prices, the earnings yield is low. This makes stocks less attractive compared to other investments like bonds, especially with current high interest rates.

Alan’s de-jargoning…

Hang on a minute! What does “earnings yield” mean. It’s like the P/E ratio but the other way round. It’s the profit you get compared to the share price.

In our example above, if the profit is £10 and the share price is £50, the earnings yield is 20% (10 divided by 50).

Alan’s thoughts…

Have you seen how much bonds etc. return compared to a simple index fund over time? This is not an argument I buy into!

This is just another way of saying that the stock market is overpriced and therefor you should sell off your stocks and put the money into bonds as you can time the market.

Bonds over time have barely kept up with inflation. There is no way I want to take my money out of stocks and shares and put it into bonds based on someone’s best guess that the market is overpriced.

5. Historical Comparisons

What people are saying…

Current valuations are comparable to previous market peaks, such as the one in January 2022. This historical context suggests that the market might be in a similar overvalued state.

Alan’s thoughts…

This one always makes Katie and me laugh. They tell us the market is at an all time high so don’t buy. If the market always goes up it will always be hitting all time highs! In 2024, the market was at an all time high 57 times!

We went to Fiji to go to Wealth Mastery by Tony Robbins. The course was terrible and had terrible advice. They played a video of Tony Robbins 10 plus years ago saying the stock market is overvalued and don’t invest. What terrible advice that was.

This is a repeating story I have heard since I started investing in 2014. I have been in the FI world and running FI events for over a decade and it is the same message repeated that people share.

No one can predict the future. This one may or may not be true but no-one knows. Am I going to change my investment strategy based on people’s predictions?

6. Economic Conditions

What people are saying…

Despite strong earnings reports and economic resilience, there are concerns about future earnings growth and potential economic slowdowns, which could make current valuations unsustainable.

Alan’s de-jargoning…

This is people saying that despite all the evidence that things look good we think it will go bad.

Alan’s thoughts…

Don’t humans have a lovely tendency to look for what can go wrong and focus on that?

There are always doom mongers out there who will tell you that things are going to go bad. They absolutely will at some point because the market is cyclical but that doesn’t mean that point is now! Don’t get caught up in all the doom online and in the press.

There is absolutely a market crash coming but no-one can predict when it is going to be. It might be this year, it might be next year, it might be 10 years from now. No-one knows and you can’t predict.

7. Inflation and Interest Rates

What people are saying…

Although inflation is falling and interest rates are stabilizing, the high rates still pose a risk. Any unexpected rate hikes could negatively impact stock prices

Alan’s de-jargoning…

This is people saying “We don’t know what is going to happen next, so the market might go down because of interest rates and what the government might do with interest rates.

Alan’s thoughts…

They are exactly right. We have no idea what is going to happen next. Things have stabilised a bit after covid, inflation has calmed down.

But who knows which way inflation is going to go over the coming years. It is not something Katie and I want to gamble on!

We will stick to our strategy of getting our money into the market as quickly as possible as we know over the long term the market always goes up. We know we can’t predict inflation rates and the best protection against inflation is to have your money invested, working for you and growing.

All these factors are reported by trusted institutions and media outlets in such a plausible way. They need to print something to keep people reading so they sell the same stories again and again and again!

Now you have read them here maybe you can spot them in the press over the coming years and have a bit more understanding so you can ignore them!

I have been hearing this same message ever since 2015. Katie and I went to our first Chautauqua in 2016 and it’s at that point that we got really involved in the financial independence community. Every year JL Collins, Mr Money Mustache and all the other speakers got asked the same question… “the stock market is overvalued, surely now is not the time to invest?”

Every year they gave the same answer…

Time in the market is more important than timing the market.

You don’t know which way the market is going to go so just invest your money and you will do well over the long run as the market always goes up on average over the decades.

I have been investing for about 10 years now and this same story comes up every time the market does well. Which if the stock market always goes up (and it does over the long term) is about 15 times a year!

If you had listened to these same stories and not invested you would have done very badly compared to just investing and getting your money into the market

What has the market done over time? What it has always done! Gone up!

This chart shows the Vanguard FTSE Developed World ex UK fund that Katie and I have most of our money in. You will have to squint to see the covid crash in 2020 and then the little rocky patch in 2022/23 with the Ukraine War. Over time the market always goes up.

The chart shows you that the stock market doesn’t care if you think it is over priced or not!

The price you are paying today for a unit of this fund will feel cheap in 10 years time! There probably will never be a cheaper time than now again and you will absolutely not be able to predict when and if it will ever happen!

Is Alan saying that the market won’t crash this year? Absolutely not.  It might do. 

What I am really saying is that no one knows when the market is going to crash.  You can not predict it. 

We know that the market will crash. I don’t know if it will be this year, next year or the year after. My message to you, to me, to Katie is just invest your money, get it in the market and leave it to grow over the long term. Stop listening to these pundits who get it wrong 90+% of the time

How are the prices of stocks and shares determined? Is there one grey haired man in a suit that is making up the price each morning and we can point at him and say “no, you have got it wrong, that price is too high?”

The overall level of the stock market is based on the collective intelligence of all investors. Some people are bullish (confident) about the stock market and are buying up, some are scared and selling and pulling out. Over all the millions of people in and out of the market the price averages out and tells you what people are willing to pay.

The theory behind this is…

Imagine a huge box of Lego Bricks at school. You are in the class and there are 30 other kids with you and you are all trading Lego Bricks to build things.

Efficient Market Theory says that everyone in the class can see the big box of bricks so we all know how many there are and what kind they are.

So as we trade we know which ones are valuable and we all have the same information so no one can trick you into trading a Lego brick for more than it is worth because you know how many there are.

This is exactly the same for a giant market like the stock market. Everyone knows all the important information about the companies, the economies and stocks. You might not have this information in your head but it is available at the tap of a button on the internet. We all have access to the same information online and through the companies reports and accounts.

Therefore the price is fair because we are all making decision based on the same information.

If you say that the stock market is overpriced you are saying that you know more than everyone else out there and you can see, with your crystal ball, that a stock market crash is coming.

This is an incredibly sexy skill and makes it an incredibly compelling story for the media to publish. The problem is this skill doesn’t exist and no one can predict the future.

As I was working on this article with Katie she said to me that “there is hype in the market, who knows if it is over priced or not?”

I said that is true we don’t know. But there is 1 thing I can tell you with 100% confidence. If I went and sold my stocks and shares right now I would get the price that the market is valued at.

Someone would hand me the amount of money for one unit of my index fund right now that it is listed for. So how can you tell me the stock market is over or under priced if I can sell it for exactly the price it is right now.

This doesn’t make sense to me.

The stock market is correctly priced based on all the information out there. The price is made up of the collective knowledge, confidence, fear and more of the entire market that is actively involved in trading. The price is what the price is.

Katie and I have come to realise that the stock market is correctly priced and anyone who says it is overvalued is guessing, trying to predict the future, whipping out their crystal ball and making shit up.

I think news outlets, people, should be banned from saying the stock market is over valued. It scares so many people when it is said with authority. The people listening take it as a fact when it just isn’t true, it’s opinion!

Or at least every person that ever says it’s overpriced should say “It is my opinion that the price of stocks and shares is high at the moment and I predict it is going to come down”

People (news, articles, pub pundits): “The stock market is going to crash this year.”
Alan: “I hear that every year. Maybe it will. Maybe it won’t. No one knows.”

People: “The stock market is over priced”
Alan: “That’s an opinion. The fact is if I hit sell right now that is exactly the price I would get for my units. Therefore the stock market is correctly priced”

People: “Bad times are coming”
Alan: “I have no idea what’s coming. No one can predict so I’m going to invest my money and leave it to grow over the long term!”

People: “Be cautious, sell some stocks or keep money in cash”
Alan: “Time in the market is more important than timing the market”

People: “I am going to move money around as I’m up to date with all the news and articles and I can see what is coming”
Alan: “In the long run, people who move their money around do worse financially than those who just invest as quickly as possible and leave their money to grow. I know I’m not smart enough to be able to predict (and neither is anyone else) so I am investing as quickly as I can and leaving my cash to grow”

Are you still investing every month? Do you have cash on the side lines that you are waiting to put into the market?

If Katie and I had any cash at hand (we don’t! I spent too much on Lego this year!) we would be putting it straight into the market right now.

We believe that

Time in the market is more important than timing the market

so we just invest everything we have got as soon as we can.

What do you believe? What do you think?

Peace and Pineapples

The Donegans

PS We are not financial advisers. We are not regulated in the UK or anywhere! Nor do we pretend to be. We can’t know your personal situation and whether you are ready to invest in the stock market or not. Full disclaimer here