The Price You Pay Still Matters

Many of us love long-term investing because it sounds clean: buy good assets, ignore the noise, and let time do the work. I believe in that. Tall oaks are not grown by checking the soil every fifteen minutes.

But every philosophy has a hidden assumption. The assumption behind “just hold long enough” is that your time horizon is actually long enough.

Valuation is not a market-timing stopwatch. A high cyclically adjusted price-to-earnings ratio (CAPE)  does not ring a bell and say, “Sell by Tuesday.” Robert Shiller’s public market data tracks U.S. stock prices, dividends, earnings, inflation, and the CAPE ratio back to 1871, making it one of the more useful long-term valuation lenses we have. Invesco noted that, as of February 2025, its CAPE measure stood at 41.1x and the Shiller P/E at 37.2x, levels higher only 6 percent and 8 percent of the time, respectively, since 1983.

Here is the uncomfortable part: Invesco found the relationship between CAPE and one-year forward returns was “practically zero,” but the relationship with ten-year forward returns was much stronger, with an R-squared of 0.78 for 1983–2015. Its model also suggested roughly 0.5 percent annualized capital returns, or about 2.3 percent total returns, over the next decade. That is not destiny. It is a reminder that price matters most when time has fewer
places to hide.

The complication is that today’s market is not a clean spreadsheet. Passive investing has become part of the plumbing. Morningstar reported that passive funds overtook active fund assets in 2023 and that indexed strategies held about 53 percent of long-term mutual fund and ETF assets by the end of 2024. S&P Global, in partnership with Vanguard, noted that the ten largest S&P 500 companies represented almost 40 percent of the index by mid-2025, a level of concentration not seen since the mid-1960s.

Add in the residue of stimulus and liquidity. The Federal Reserve said in its June 2025 Monetary Policy Report that asset valuations remained high relative to fundamentals across equities, corporate debt, and residential real estate. The Federal Reserve Bank of St. Louis also noted that, by January 2025, M2 was about 44 percent above its 2016–2019 average while debt held by the public was about 65 percent higher, following pandemic-era fiscal assistance financed with new debt.

Maybe those are distortions. Maybe they are the new map. This is where humility matters. Markets can be expensive and still go up. If money keeps flowing into cap-weighted indexes, the biggest trees can get more sun for longer than seems reasonable. Being “right” on valuation and early can feel exactly like being wrong.

So the better question may not be, “Will the market crash?” It may be, “If the next ten years are less generous than the last ten, what should I do while gains are available?”

That does not require panic. It may mean harvesting some profits, rebalancing, holding more liquidity, matching assets to income needs, or giving appreciated dollars a specific job in the plan. Karma pays dividends, but so does discipline.

Active management does not mean pretending to know every tick. Professionals can time ranges, not ticks. In this environment, prudent decisions may matter more than blind allegiance to “buy and hold forever.”

Maybe CAPE is too pessimistic. Maybe AI, passive flows, and policy support carry markets higher for years. But if your plan needs money before the market’s long-run math has time to work, valuation is not just an academic number. It is a question of whether your calendar is long enough to let the theory be right.

Disclosure: Information presented is for your educational purposes only and should not be regarded as a complete analysis of the subjects discussed.  Discussions and answers to questions do not involve the rendering of personalized investment advice but are limited to the dissemination of general information.  A professional advisor should be consulted before implementing any of the options presented.

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