“Be fearful when others are greedy and greedy when others are fearful” —Warren Buffett
There is a lot of buzz around the stock market right now!
As of writing this, the stock market is extremely overvalued.
Because of this, a lot of people are scared to death of a stock market crash.
None of us want another 2008 or even a 1929, but with the way that things are moving, another crash is inevitable. And soon.
Why is this going to happen, you may ask? Because it has happened many times before!
But I am not here to be a fearmonger.
I want to show you the reasons behind why this is going to happen so you can best plan for your financial future!
A Historically High P/E Ratio
Right now, the stock market is overvalued.
Looking at the below chart, we are in an extreme bubble state with a P/E ratio of 38.
P/E ratio stands for Price to Earnings. The total price of the asset is divided by the income that you gain from it.
How much you are getting, for how much it is costing you.
The best way to explain this is an example.
If you bought the gas station down the street for $1 million and each year you earn $100,000, then you have a P/E ratio of 10 (1 million divided by 100,000).
So you are paying 10 dollars for every dollar earned.
Now looking back at the current P/E of the stock market, that means you are paying 38 dollars for every dollar earned. That is very, very expensive.
Typically what is considered average in the stock market is a P/E of 14 or 15, and everything over that is considered overvalued.
Unfortunately for us, we’ve crossed into the threshold of a bubble. The P/E ratio has gotten so high that it isn’t sustainable.
The earnings are not there to support the high cost of the investment.
So over time, the stock market can’t stay as it is. It HAS to crash. It’s not only possible, but it is inevitable.
Historic Highs in Total Stock Market
The stock market is also going to crash because of its all-time high market value.
To put this into perspective, in 2008 the S&P was valued at 600.
At the time of writing this, the S&P is valued at 3800. That is six times as large!
Our economy has grown since 2008 for sure, but by 600%.
A lot of this comes from the federal reserve printing huge amounts of money after 2008 and the subsequent asset appreciation.
You may be thinking… but the stock market goes up over time, right?
This is true! But there are two key things to remember.
Firstly, while the stock market trends positively over long periods, this is an average growth. That average doesn’t protect you in the short term. It doesn’t protect you from 50/60% drops in stock prices that have historically happened.
The second thing to remember about stock market crashes is that they can take a very long time to recoup the losses in value.
1929 and the Great Depression is the warning that everyone remembers. But what most people don’t know is that the value of the market took twenty-five years to recuperate.
That is way too long!
Asset values are appreciating faster than the actual growth of the economy. Faster than the market can handle. Pretty soon there will be a crash in the market to course correct. And it may take years for your investment to regain its worth.
I remember when I worked as an investment advisor, stocks and bonds were always considered traditional. They were the standard package. Safe.
The challenge to that idea is if the stock market is your only investment and there is another crash, what do you have left? Is that so safe?
Low Interest Rates Cause Asset Bubbles
The next reason the stock market is going to crash is the asset bubble.
Since the 2008 Financial Crisis, the Federal Reserve has kept interest rates at zero (or close to it) for several years.
The idea behind this was to stimulate the economy. The theory being the lower the interest rates, the more that consumers spend and thus stimulating the economy.
However, a consequence of this action is with such low interest rates, people are pushed to take riskier investments such as the stock market to get returns.
This causes an asset bubble in which these assets continue to expand in price, even if they don’t expand in value (or in other terms, a high P/E ratio).
But it’s not just the stock market.
Real estate and other assets are affected too!
I know I hit a tender spot there. No one wants their real assets to continually rise in price and not make a profit from it.
But the real question is… how long with this last?
Well, the simple answer is until interest rates rise again.
The good news is that they will have to rise eventually.
Given the size of the asset bubble and the amount of money that is being printed, raising interest rates will be the Federals Reserve’s best tool to keep up with the coming inflation.
Unfortunately, the timing is uncertain.
But we do know it will happen.
As JP Morgan once said, prices will fluctuate.
Now, I wouldn’t fault you for thinking I am against the stock market.
But I’m not!
Stocks can be a great investment, but looking at all of these factors, there is a high risk of a crash at the moment.
If you are wanting to take care of your financial future, then you need to know what is happening and be able to put yourself in the best position to succeed.
As John Rockefeller said, “the way to make money is to buy when blood is running in the streets.”
The best time to buy is when the assets are undervalued, not now when the balloon keeps getting bigger and bigger and waiting to pop.
As one of my favorite people said:
“Be fearful when others are greedy and greedy when others are fearful”
People are being greedy now. They are trying to get as much as they can out of the balloon as fast as they can. So for the rest of us, it is time to be wary.
But even with all the doom and gloom of the eventual crash, there are still alternatives to the stock market that can still set you up for financial freedom.
My favorite is multi-family syndication. Not only do they historically perform well during recessions, but they have a built-in hedge against inflation.
If you’re interested in learning more, then you are in the right place!
Check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
If you are interested in investing with us, we are happy to answer any questions that you may have. Join our investment club today and we will be in touch.
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