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Re: U.S. market very tech heavy and with a CAPE over 35. Scary??


vriguy1 wrote: Tue Aug 26, 2025 3:07 pm

nisiprius wrote: Sat Aug 23, 2025 7:36 am

Generic predictions, like Roger Babson’s “Sooner or later a crash is coming and it may be terrific,” fall under the heading of “what everybody knows is not worth knowing.”

The problem with trying to act on such things is that it doesn’t move the needle much–nowhere near as much as you might think–unless

a) you make a really large, drastic, risky commitment to the action, and

b) you are quite accurate on the timing.

To illustrate, let’s use an example that’s fairly close to what I personally did. After Alan Greenspan’s “irrational exuberance” speech on December 6th, 1996 I said that never again in my life would I hear such a clear warning from someone who had real inside knowledge. I did not go to cash, but I did reduce my stock allocation.

Greenspan’s warning was either just plain wrong, or came three years too soon. (Or, of course, was too vague to mean anything and I misinterpreted it.)

So did I hurt myself or help myself by pulling back? Well, it’s enough of a wash that it’s easy to see it either way. It did partially reduce my pain during the 2000-2003, but only after partially missing out on three years of “exuberance,” some of the best years in stock market history: 33.67%, 28.73%, 21.11%.

So, let’s look at some numbers. Suppose that on the day of Greenspan’s speech, two investors–blue and red curves–each held $100,000 in a 60/40 portfolio with 30% of stocks international. The blue curve shows the experience of an investor who stays the course in 60/40. The red curve shows the experience of an investor who eases back to 40/60.

Source

The date of Greenspan’s speech happens to be a date from which the two portfolios leapfrog. The leapfrogging continues up through the end of 2011. (After that, the long bull market kicks in and the 60/40 portfolio pulls ahead and stays ahead).

At no point is either portfolio more than 11% ahead or behind the other. Sure, you can say, the difference between

$160,000 and $145,000 (in 2000), or the difference between

$126,000 and $135,000 (in 2003) is enough to care about, but it’s not life-changing, make-or-break, succeed-or-fail different.

Which investor was “right?” It depends on your metrics. This link will show you the whole period from Greenspan’s speech through today. The investor who stayed the course at 60/40 ended up with more money. The investor who pulled back to 40/60 suffered from less volatility and ended up with a higher Sharpe ratio (better return for the amount of risk taken).

FANTASY: You see the obvious crash coming, you pull out of the market completely, the market crashes a few months later, and you sit there safe and warm with money in the bank while people blindly staying the course suffer.

MY REALITY: I saw the obvious crash coming, I didn’t do anything too drastic but I did cut back, the crash didn’t happen for years, I missed out on years of growth, and when the crash finally happened the people blindly staying the course suffered and so did I–just not as much.

STORYTELLING: “When Greenspan warned of ‘irrational exuberance’ I took it seriously and was able to sell some of my stocks before the market crashed.” True but misleading.

Is this rebalancing each year, or just letting it ride?

Monthly rebalancing according to the link.

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