Shiller Pe Ratio

Which is interesting "this time" because much of the issue may be due to historical and tax-quirk fullfilling index weighting. And the people invested nearly entirely in these indexes is kinda by definition the people who normally don't even look at their investments. "Irrational autopilot"?

https://fred.stlouisfed.org/graph/?g=tRur

Or am I looking at the wrong graph?

Very confusing picture

Value funds are widely available (often paired with the opposite "growth" funds), and you can put some money there if it helps you sleep. The concept might already be oversubscribed, idk, but at least it's simple and you're still owning equities at 1x, no weird derivatives. It's not a big fancy ripoff like some sort of "structured product" that you'll get if you ask your question here of a self-interested financial advisor.

If you think you've got too much Mag 7, you could also go for small and midcap funds. Often means higher beta & vol, but less concentrated. But who knows, aggregation theory might still not yet be fully played out, and the giants could keep eating more and more of the pie.

Bond funds have a place, too.

* Or maybe not, see reducesuffering's comment below.

They often have something like "Value" in the name, e.g. VTV, IUSV, SPYV. While not explicitly targetting now Shiller PE, they usually have significantly lower PE than "growth orienten" stocks (such as most of the tech megacaps that currently dominate SP500, VT and other market cap weighted funds). What exactly goes into "Value" funds is either too opaque or takes too long to explain in a comment.

> what difference does it make in terms of volatility and/or expected returns to invest in something like SP500 or $VT compared to Shiller-PE-adjusted products?

Volatility is likely (but not certainly) lower. Expected returns: convincing narratives could be told either way, but nobody knows with any certainty.

> does this matter in the long-term, or better, when exactly is "long-term" long enough so that Shiller PE doesn't matter and one can just go with SP500/$VT without sleepless nights?

Again, nobody knows, and you should be skeptical about pretty much any opinion that smells like investment advice. The posted graph shows that the current S&P 500 PE (or some approximation thereof, SP500 didn't exists until the 1950s) is high by historical standards. What to make of that is open to different interpretations.

Many people might intuit some sort of mean-reversion process behind (Shiller-)PE, but

- it's unclear which to "mean" and at what time frame it would revert

- as another poster pointed out, mean-reversion could take place by E going up as well as P going down

The NASDAQ topped at 5,048.62 on March 10, 2000. It took 15 years for the NASDAQ to recover to its dot-com peak level. In those 15 years, you got an inflation-adjusted negative annualized ROI.

Annualized return of the NASDAQ from the 2000 peak to today is an inflation-adjusted 3.4%. Even "sure thing" blue chips like Cisco and Intel still haven't recovered their 2000 peaks in real terms, 25 years later.

But most of the companies that people were "investing" in at the time, the ones that drove that PE, were dot coms that went out of business. Like pets.com.

As Warren Buffett warned at the time, every new technology wave results in a similar bubble. People invest because we know that the technology will reshape the future. And we reward the first to the market because we can't imagine that they won't be long-term winners.

But the companies that arise early in a technology bubble, are seldom the ones that survive long-term.

We are witnessing the same today. Most of the current AI leaders, won't be AI leaders in 20 years. So which one will you invest in?

Stock prices are not just historically high relative to earnings (using CAPE or not), they're historically high relative to book value or sales. There might be a clever effort to not have earnings that are justified by share price, for tax reasons. Is there similarly a clever effort to not have sales that are justified by share price?

> due for correction

That's pretty hard to predict.