The Market’s Looking Frothy, Very Frothy

Those looking to manage their personal finances these days and keep up with the Jones’ seem to have no choice but to be invested in the stock market. Whether it’s for retirement or a long-term savings goal such as the kid’s education fund, equities have continued to outperform almost every asset class out there. Missing out on the outsized returns of stocks can provide a level of fear we haven’t seen in some time.

However, it’s always important to keep the risks a fear of missing out (“FOMO”) attitude in check. Investing to beat the market (getting greedier than the average investor today) can be dangerous, given where we’re at in terms of aggregate valuations right now.

One of Warren Buffett’s key metrics he uses to gauge just how overvalued or undervalued the stock market has gotten at a specific point in time is to measure the total value of the stock market compared to the total value of the underlying economy, as measured by GDP. On these metrics, today’s stock market appears to be the frothiest in history right now.

Having objective metrics one uses to validate whether an investment makes sense at a given point in time is important in any market. With today’s heightened valuations across the board, such discipline is more important than ever. How long this bull market can run remains to be seen, however with monetary and fiscal policy mandates likely to continue to be accommodative for some time, staying invested makes sense.

Taking on too much risk, however, ought to be avoided.

Invest Wisely, My Friends.