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I have some life savings I want to invest. My first idea was to buy a flat or home - but the current price levels for houses and flats in my country are beyond insane because of the money policy of the European Central Bank (cheap loans). Instead, I now want to put that money into the Stock market (ETF or single stocks). However, it seems that the situation in the stock market is also looking like everything is overbought, I mean just look at the current S&P500 graph for example.

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Or the German DAX. This looks exactly like the 2017s Bitcoin Bubble before it completely went from 20.000 to 3.000 over the course of the next year. How is anyone looking at this S&P500 graph and thinking "this is sure a good idea to invest"?

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    What specifically about that graph makes it look "overbought"? I'm not asking that sarcastically - the trend shows exponential growth which is normal. A linear price curve would mean that relative growth is declining. – D Stanley Jan 23 at 17:29
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    What's the time frame on that (unreadable) graph? The S&P 500 has gone from slightly over 1000 to not quite 3500 in 10 years; that's hardly equivalent to the speculation that drove BitCoin's price through the roof (and back through the floor). – chepner Jan 23 at 19:14
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    Bitcoin has no value. Behind every share there's a company producing and selling goods. – Bernhard Döbler Jan 23 at 20:42
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    You say that the graph has an "obvious" property. If that property is obvious then you should be able to precisely say what characteristics make it "obvious" that the particular property is met. Can you say precisely what makes it "obvious" that the "overbought" property exists? – Eric Lippert Jan 23 at 21:39
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    Now that you have two things -- a classifier that characterizes a property, and a consequence of that property, then you can do historical analysis. Apply your classifier to all previous days' market data and see if your prediction came true more than you would expect by chance. If you do this and get results better than chance, then congratulations, you have invented a moneymaking technical analysis! If you do not get results better than chance, then something in your analysis is wrong; either the property cannot be determined "obviously", or the predictive nature is incorrect. – Eric Lippert Jan 23 at 21:43
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What about that graph today is different from that graph would have been 6 months ago? People 6 months ago bought thinking it would still go up, and it has. That's why people are buying today. That's what you asked. They may be right, they may be wrong, but that's why they are buying.

Further, they may be buying because they have few other options. If interest-bearing instruments and real estate are not good choices, people turn to the stock market. And as long as more people keep turning to the stock market, those who need to sell for whatever reason will find someone to sell to -- at a profit.

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I deny your assertion that that market is overbought, and have a graph to lend credence to my assertion.

enter image description here

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    @BobBaerker I strongly disagree with that. Why does it matter what stock prices are doing 6 weeks from now if you're not selling for a year ? – xyious Jan 23 at 20:46
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    @xyious exactly. It's not useful for a trader, but very useful for buy-and-hold types. – RonJohn Jan 23 at 20:59
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    @BobBaerker "is this a good time to invest" .... investing implies buy and hold. Investing implies not worrying about short term fluctuations. The question specifically isn't about speculating or trading. – xyious Jan 24 at 18:15
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    @BobBaerker was it overbought in 2008, or was the market collapse a result of the popped real estate bubble and ensuing GFC? – RonJohn Jan 24 at 18:34
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    @BobBaerker quoting the question, "I mean just look at the current S&P500 graph for example." He's got a linear graph that makes exponential growth look scary, and I've got a logarithmic graph that makes the S&P500 look consistent with long term 7% growth. If you think my answer is wrong, then you know that the solution is to down-vote it. – RonJohn Jan 26 at 7:41
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What's the alternative? Bonds? Interest rates are at historic lows in most developed areas. Commodities? Energy prices are relatively low and have enormous volatility (remember the oil spike a few weeks ago after the US-Iraq dust-up? That's gone now). Mattresses? You actually lose value due to inflation.

I don't know that people are saying that "it's a good idea to invest in equities" because the market is cheap. It's because it's still one of the best investments in terms of risk vs. reward.

Will there be a correction or even a crash? Possibly, but you and I have no idea when that will happen or how big it might be. Even if there is, historically the market has recovered in a few years with very rare exceptions. So if you have a long investment horizon (e.g. retirement for a young person or college savings for new parents) then you can weather the ups and down of the equity market and will almost certainly come out ahead in the long run.

  • The recovery from the past two bear markets (2000 and 2008) has been more than just a few years. It's closer to 6 and 5 years, respectively, from the pre-collapse peaks. – Bob Baerker Jan 23 at 17:46
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    Anecdotal, but my mattress has definitely experienced deflation in recent years. – user48207 Jan 23 at 20:54
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1: Don't time the market

As the saying goes "time in the market beats timing the market". If you have money to invest, investing the money will yield better results than not investing the money. Unless you know a crash is coming (in which case why would you tell us instead of making your billions) you should be investing.

2: Why would you conclude that the market is crashing ?

There's many really good investors who make it clear that they can't predict a stock market crash. Why would you conclude that you're better than all of them (combined) ?

3: Over the long term the market goes up

Despite the crashes. There's not a single point in time at which it wasn't better to invest than not to invest. So unless you sell your securities at a worse price than you bought them for you will make money (disclaimer: unless you buy companies at risk of going bankrupt in the next few years).

4: What's the alternative ?

As others have pointed out there aren't a whole lot of other options. You don't want to buy stocks, you don't want to buy real estate. You could buy bonds, you could just put the money into a savings account (for a loss to inflation).

5: You could pick individual stocks

You said "everything is overbought" which is not true. On average the market is pretty high, but that doesn't mean that there aren't companies that are cheap right now. There's quite a few companies that have a pretty solid dividend and a reasonable P/E.
Disclaimer: You need to be a better investor than the market as a whole. Most investors won't beat the market. It is extremely hard to beat the S&P500 by picking stocks. Just go with index funds if you're not 100% sure what you're doing and comfortable with losing money and/or not beating the S&P500.

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    "Despite the crashes there's not a single point in time at which it wasn't better to invest than not to invest." Before every bear market is the worst time to invest. It took 5-6 years to recover from the past two bear markets. – Bob Baerker Jan 23 at 20:44
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    @BobBaerker So you're saying you timed the market and didn't invest before the bear market started ? Or did you short stocks in the bear market and made a fortune ? – xyious Jan 23 at 20:47
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    @xyious If you put money in just before a crash, it would have been better not to invest, in that putting the money in at any time after a crash and before the recovery to previous levels would have been a better long-term investment. – David Heyman Jan 24 at 2:12
  • @xyious - I timed the market? Hardly. I reacted to it. And yes, I sold off a lot of my long positions in late 2007 and transitioned to net short for 2008 and most of 2009. 1987 taught me that the market can take a lot of money away from your rather quickly. 2000 taught me that one can indeed get out of the way of a 50% drop in the market. 2008 taught me that not only can you get out of the way of a 50% drop in the market but you can also make a sh*tload of money as the market craters. Call it luck if it makes you feel better but I'd call it learning my lessons. – Bob Baerker Jan 24 at 15:46
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Easy.

Stocks are expensive. So are you going to invest to bonds?

Bonds are expensive too. The interest rates of bonds are near to zero in Eurozone and low in US too.

If stocks normally offer 3% real growth + 2% inflation = 5% nominal growth and 4% dividend, i.e. 9% total return, and now the dividend yield has fallen to 2%, the total return in current market conditions is 3% real growth + 2% inflation + 2% dividend yield = 7%. Only 2% lower than usually.

I think you'll find that bond yields are 2% lower than usual, too.

There's no such a thing as a free lunch. By claiming you should not invest into stocks, you are claiming there is an option whose risk-return relationship is better. Such an option would be a free lunch. There's no such a thing as a free lunch.

  • Except that there might well be options that are better. E.g. buying a house, or remodelling your current one. Even if it doesn't pay off in dollars (or your local currency), it well may in terms of quality of life. – jamesqf Jan 24 at 17:15
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In part it's the bandwagon effect. People tend to do things, whether it's investing in apparently overpriced stocks or buying Beanie Babies* in hopes of selling them at a profit, not because they have rationally analyzed the risks & rewards, but because lots of other people are doing it.

So we hear lots of news (and proclamations from certain politicians) about how the stock market keeps going up, and so people who hadn't invested before decide they're going to start investing in the market too, because it's bound to keep going up, isn't it? That means the prices of stocks keep rising, because more people want to buy them.

Unfortunately, the market always collapses eventually. If the bubble is in something that has little or no inherent worth, like Beanie Babies or derivatives, it stays collapsed. With things than have inherent worth, like stocks, the market tends to drop to below inherent worth, then rebound to that level and grow slowly until the next cycle starts.

*Or bitcoins, or tulip bulbs, if you happen to have lived in Holland in the 17th century: https://en.wikipedia.org/wiki/Tulip_mania

  • The strange thing is, Bitcoins don't have inherent worth and nevertheless keep on going up and down since 2018. – glglgl Jan 24 at 15:40
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    @glglgl: Up & down since 2018? That's not very long, you know. – jamesqf Jan 24 at 17:12
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An investor, who is interested in the stock market indexes but thinks that they are too high, could take inverse positions. However, the long-term stock-market trend is upward so an inverse position would be an attempt to catch a short-term trend.

Or the investor could take long positions in the indexes and write covered-calls on the indexes. But note that a hedge of the underlying position could be a large loss in an uptrend because the short-calls will have given up most of the upside of the underlying position. So a hedge needs a price point of the underlying position where the hedge is closed out.

Basically, if the investor thinks that the stock market indexes are too high then the investor can sell calls to investors that think the market is going higher.

But why are ordinary investment positions continuing to invest at high price levels ? Well, the indexes re-balance such that declining stocks are reduced in the index. This re-balancing of the indexes has produced recent years' triple tops as the indexes re-balanced and rode the new balances back up. To beat the logic of the stock indexes then everything has to go down.

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Every now and then, you'll see a news article declare that some index or exchange has reached a new record high. It would be easy to say: "Well, clearly, that means it's a bad time to buy into the market." Except there's one problem with that thinking: over the long term, pretty much every major market grows without bound. That means that said markets must reach new record highs on a regular basis.

Markets grow partly because inflation devalues the currency used to buy shares, but mostly because the companies comprising the markets simply get better at what they are doing over time, just like people often do. That is, the market grows about 2-3x as fast as inflation, over the long run. Which means, looking at the market itself to decide whether it's overbought is not a strong idea, as others have noted.

The only way to confidently assert that it's overbought is to show a better alternative. That is, if you have an investment option that is offering better risk/reward, then simply share it with us. Until then, your "investment sheeple" are acting more rationally than you might care to admit.

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Investors act because they expect a return on their money. This is true in overbought sectors, where 'momentum' and the 'next greater fool' comes into play.

Bulls make money
Bears make money
(Greed) Pigs are slaughtered. 
- Jim Cramer

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