We haven’t suffered from a lack of bear market prognostications over the past several years. I have learned to tune most of them out, but there are certain individuals and data points that catch my attention and cause me to reevaluate my thought process.
One of those people is Professor Robert Shiller of Yale University. In the past two weeks, he has written pieces for the New York Times and for Project Syndicate discussing the vulnerability of the market today based on current valuations. The Times article seems to implicitly imply there is a sense of complacency in the market today that doesn’t make a lot of sense given valuation levels while the Project Syndicate piece is a much more explicit warning against complacency in today’s market.
We obviously should never be complacent while investing but we shouldn’t be fearful either. We need to approach the future confidently and optimistically with two important facts in mind. First, there will always be another bear market looming; and second, our portfolios will inevitably lose money again someday. However, well-constructed portfolios that properly reflect our individual risk tolerances and time horizons and that are carefully managed according to explicit rules and/or systematic processes will be fine in the long-run assuming we have sufficient time to recover.
While difficult, we need to learn to take market declines and portfolio losses in stride as they more likely than not will be transitory. Keeping our eye on the long-term goal should be among the foremost of our goals as investors.
So yes, absolute valuations are high today relative to historical absolute levels. A bear market will surface again someday. We will experience losses in our portfolios again, but if we are prepared and disciplined we will be okay.