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What to Do When You Feel the Market Is Overvalued
Key takeaways
- A feeling that the market is overvalued is normal — it seemed expensive in 1995, 2013, and 2020, yet it rose significantly thereafter.
- Valuation metrics such as CAPE have predictive power over decades, not years.
- The right response to an "expensive market" rarely involves exiting the market entirely.
- Diversification, regular investing, and maintaining a cash reserve are practical solutions.
- Time spent in the market matters more for long-term investors than timing the entry.
The feeling that the market is overvalued is one of the most common reasons people postpone investing — and simultaneously one of the most costly mistakes they can make.
Why "I'll wait for cheaper prices" is a dangerous strategy
The market seemed overvalued by the standards of its time in 1995. Then came a five-year boom. It seemed overvalued again in 2013 after the post-financial-crisis recovery. Then came seven more years of growth. Every year, analysts have compelling arguments for why not to buy now. Those who listened missed the compounding that works without pause.
What valuation metrics actually say
Shiller's P/E (CAPE) is a legitimate metric — it compares share prices to average earnings over the preceding ten years. A high CAPE statistically predicts lower returns over the next 10–15 years. But it is not a signal to exit the market — it is a signal to have mildly tempered expectations. Moreover, alternatives (cash, bonds) carry their own risks and costs.
A practical response to an "expensive market"
- Keep investing regularly — the DCA strategy automatically buys fewer shares at higher prices.
- Check your allocation — if you are 100% in equities and sleeping poorly, consider adding bonds rather than leaving the market.
- Diversify geographically — if you are worried about US market overvaluation, add global exposure.
- Maintain a reserve — 3–6 months of expenses in cash prevents forced selling during an income disruption.
What not to do
Do not sell everything and wait for the "right moment". Studies repeatedly show that investors who leave the market come back late — typically after the recovery has already happened. Time spent in the market almost always beats entry timing.
FAQ
Is Shiller's CAPE a reliable measure of overvaluation?
It has statistically documented predictive power for returns over the next 10–15 years, not for short-term movements. A high CAPE means "expect lower returns", not "sell everything and flee".
Is it worth waiting for a correction?
Not necessarily. A correction might come in a month or in five years. Meanwhile, compounding passes you by. Statistically, for a long-term investor it is worse to be out of the market than to buy at an "inopportune" time.
What should I do with cash if I think the market is expensive?
Consider deploying it gradually through regular investing, review your allocation across different markets and assets, and make sure you have an adequate reserve outside your investments. Those are concrete steps rather than waiting.