Why was S&P 500 PE Ratio so high on May 2009
"Asking why the p/e was so high is best answered ""because reported earnings were so low"". Recall that the S&P500 bottomed in early March 2009 when the panic of the financial crisis reached exhaustion.  As noted on the page you have linked, the reported p/e ratios are computed using reported earnings from the trailing twelve months.  During those twelve months the banks were writing down all of the bad debt associated with the mortgage backed securities that has lost so much value.  This meant that the banks were reporting negative earnings.  Since the financial sector is a large part of the S&P500, this alone had an enormous effect on the index p/e.  However, the problem was compounded by a general collapse in earnings across the economy as consumers reacted to the resulting uncertainty.  The same site reports earnings for the previous years at $17.11 for the S&P500, compared to $76.17 for the year prior to 2008.  That is a collapse of about 78% in earnings.  Although the S&P500 has suffered badly during this time, stock market investors being forward looking were starting to price in improved earnings by May 2009.  Indeed, the S&P500 was up about 33% in just two months, from its low in March2009 to mid May2009.  Thus, by May of 2009 prices were not suffering to the same extent as reported trailing earnings.  This would account for the anomalous p/e value reporting in May2009."
"TL;DR - go with something like Barry Ritholtz's All Century Portfolio: 20 percent total U.S stock market 5 percent U.S. REITs 5 percent U.S. small cap value 15 percent Pacific equities 15 percent European equities 10 percent U.S. TIPs 10 percent U.S. high yield corp bonds 20 percent U.S. total bond UK property market are absurdly high and will be crashing a lot very soon The price to rent ratio is certainly very high in the UK.    According to this article, it takes 48 years of rent to pay for the same apartment in London.  That sounds like a terrible deal to me.  I have no idea about where prices will go in the future, but I wouldn't voluntarily buy in that market. I'm hesitant to invest in stocks for the fear of losing everything A stock index fund is a collection of stocks.  For example the S&P 500 index fund is a collection of the largest 500 US public companies (Apple, Google, Shell, Ford, etc.).  If you buy the S&P 500 index, the 500 largest US companies would have to go bankrupt for you to ""lose everything"" - there would have to be a zombie apocalypse. He's trying to get me to invest in Gold and Silver (but mostly silver), but I neither know anything about gold or silver, nor know anyone who takes this approach. This is what Jeremy Siegel said about gold in late 2013: ""I’m not enthusiastic about gold because I think gold is priced for either hyperinflation or the end of the world.""  Barry Ritholtz also speaks much wisdom about gold.  In short, don't buy it and stop listening to your friend.   Is buying a property now with the intention of selling it in a couple of years for profit (and repeat until I have substantial amount to invest in something big) a bad idea? If the home price does not appreciate, will this approach save you or lose you money?  In other words, would it be profitable to substitute your rent payment for a mortgage payment?  If not, you will be speculating, not investing.  Here's an articles that discusses the difference between speculating and investing.  I don't recommend speculating." The major drawback to borrowing to invest (i.e. using leverage) is that your return on investment must be high enough to overcome the cost of finance. The average return on the S&P 500 is about 9.8% (from CNBC) a typical unsecured personal loan will have an interest rate of around 18-36% APR (from NerdWallet). This means that on average you will be paying more interest than you are receiving in returns so are losing money on the margin investment. Sometimes the S&P falls and over those periods you would be paying out interest having lost money so will have a negative return! You may have better credit and so be able to get a lower rate but I don't know your loan terms currently. Secured loans, such as remortgaging your house, will have lower costs but come with more life changing risks. The above assumes that you are getting financing by directly borrowing money, however, it is also possible to trade on margin. This is where you post a proportion of the value that you wish to trade with as collateral against a loan to buy the security. This form of finance is normally used by day traders and other short term holders of stocks. Although the financing costs here are low (I am not charged an interest rate on intraday margin trading) there are very high costs if you exceed the term of the loan. An example is that I am charged a fee if I hold a position overnight and my profits and losses are crystallised at that time. If I am in a losing position at that time the crystallisation process and fee can result in not having enough margin to recover the position and the loss of a potentially profit making position. Additionally if the amount of collateral cash (margin) posted is insufficient to cover the expected losses as calculated by your broker they will initiate a margin call asking for more collateral money. If you do not (or cannot) post this extra margin your losing position will be cashed out and you will take as a loss the total loss at that time. Since the market can change very rapidly, such as in a flash crash, this can result in your losing more money than you had in the first place. As this is essentially a loan you can be bankrupted by this. Overall using leverage to invest magnifies your potential profits but it also magnifies your potential losses. In many cases this magnification could be sufficient to lose you more money than you had originally invested. In addition to magnification you need to consider the cost of finance and that your return over the course of the loan needs to be higher than your cost of finance as well as inflation and other opportunity costs of capital. The S&P 500 is a relatively low volatility market in general so is unlikely to return losses in any given period that will mean that leverage of 1.25 times will take you into losses beyond your own capital investment but it is not impossible. The low level of risk automatically means that your returns are lower and so your cost of capital is likely to be a large proportion of your returns and your returns may not completely cover the cost of capital even when you are making money. The key thing if you are going to trade or invest on leverage is to understand the terms and costs of your leverage and discount them from any returns that you receive before declaring to yourself that you are profitable. It is even more important than usual to know how your positions are doing and whether you are covering your cost of capital when using leverage. It is also very important to know the terms of your leverage in detail, especially what will happen when and if your credit runs out for whatever reason be it the end of the financing period (the length of the loan) or your leverage ratio gets too high. You should also be aware of the costs of closing out the loan early should you need to do so and how to factor that into your investing decisions. The compound annual growth rate of the S&P 500 over the last 20 years is in excess of 7% annually. http://www.moneychimp.com/features/market_cagr.htm Several index funds mirror the S&P 500 such as, but not limited to SPDR S&P 500 ETF Trust. An annual growth rate of 7% on a $5,000,000 portfolio implies gains of $350,000 per year, every year investing passively. Most of us can live reasonably well on $350,000 per year! I will argue that the chances of all 500 companies in the S&P 500 going bankrupt or nearly so at once is slight and less likely than the same for Google. "This turned out be a lot longer than I expected.  So, here's the overview. Despite the presence of asset allocation calculators and what not, this is a subjective matter.  Only you know how much risk you are willing to take.  You seem to be aware of one rule of thumb, namely that with a longer investing horizon you can stand to take on more risk.  However, how much risk you should take is subject to your own risk aversion.  Honestly, the best way to answer your questions is to educate yourself about the individual topics.  There are just too many variables to provide neat, concise answers to such a broad question.  There are no easy ways around this.  You should not blindly rely on the opinions of others, but rather use your own judgment to asses their advice. Some of the links I provide in the main text: S&P 500: Total and Inflation-Adjusted Historical Returns 10-year index fund returns The Motley Fool Risk aversion Disclaimer: These are the opinions of an enthusiastic amateur.  Why should I invest 20% in domestic large cap and 10% in developing markets instead of 10% in domestic large cap and 20% in developing markets? Should I invest in REITs? Why or why not?  Simply put, developing markets are very risky.  Even if you have a long investment horizon, you should pace yourself and not take on too much risk.  How much is ""too much"" is ultimately subjective.  Specific to why 10% in developing vs 20% in large cap, it is probably because 10% seems like a reasonable amount of your total portfolio to gamble.  Another way to look at this is to consider that 10% as gone, because it is invested in very risky markets.  So, if you're willing to take a 20% haircut, then by all means do that.  However, realize that you may be throwing 1/5 of your money out the window. Meanwhile, REITs can be quite risky as investing in the real estate market itself can be quite risky.  One reason is that the assets are very much fixed in place and thus can not be liquidated in the same way as other assets.  Thus, you are subject to the vicissitudes of a relatively small market.  Another issue is the large capital outlays required for most commercial building projects, thus typically requiring quite a bit of credit and risk.  Another way to put it: Donald Trump made his name in real estate, but it was (and still is) a very bumpy ride.  Yet another way to put it: you have to build it before they will come and there is no guarantee that they will like what you built. What mutual funds or index funds should I investigate to implement these strategies?  I would generally avoid actively managed mutual funds, due to the expenses.  They can seriously eat into the returns.  There is a reason that the most mutual funds compare themselves to the Lipper average instead of something like the S&P 500.  All of those costs involved in managing a mutual fund (teams of people and trading costs) tend to weigh down on them quite heavily.  As the Motley Fool expounded on years ago, if you can not do better than the S&P 500, you should save yourself the headaches and simply invest in an S&P 500 index fund. That said, depending on your skill (and luck) picking stocks (or even funds), you may very well have been able to beat the S&P 500 over the past 10 years.  Of course, you may have also done a whole lot worse.  This article discusses the performance of the S&P 500 over the past 60 years.  As you can see, the past 10 years have been a very bumpy ride yielding in a negative return.  Again, keep in mind that you could have done much worse with other investments. That site, Simple Stock Investing may be a good place to start educating yourself.  I am not familiar with the site, so do not take this as an endorsement.  A quick once-over of the material on the site leads me to believe that it may provide a good bit of information in readily digestible forms.  The Motley Fool was a favorite site of mine in the past for the individual investor.  However, they seem to have turned to the dark side, charging for much of their advice.  That said, it may still be a good place to get started.  You may also decide that it is worth paying for their advice. This blog post, though dated, compares some Vanguard index funds and is a light introduction into the contrarian view of investing.  Simply put, this view holds that one should not be a lemming following the crowd, rather one should do the opposite of what everyone else is doing.  One strong argument in favor of this view is the fact that as more people pile onto an investing strategy or into a particular market, the yields thin out and the risk of a correction (i.e. a downturn) increases.   In the worst case, this leads to a bubble, which corrects itself suddenly (or ""pops"" thus the term ""bubble"") leading to quite a bit of pain for the unprepared participants.  An unprepared participant is one who is not hedged properly.  Basically, this means they were not invested in other markets/strategies that would increase in yield as a result of the event that caused the bubble to pop.   Note that the recent housing bubble and resulting credit crunch beat quite heavily on the both the stock and bond markets.  So, the easy hedge for stocks being bonds did not necessarily work out so well.  This makes sense, as the housing bubble burst due to concerns over easy credit. Unfortunately, I don't have any good resources on hand that may provide starting points or discuss the various investing strategies.  I must admit that I am turning my interests back to investing after a hiatus.   As I stated, I used to really like the Motley Fool, but now I am somewhat suspicious of them.  The main reason is the fact that as they were exploring alternatives to advertising driven revenue for their site, they promised to always have free resources available for those unwilling to pay for their advice.  A cursory review of their site does show a decent amount of general investing information, so take these words with a grain of salt.  (Another reason I am suspicious of them is the fact that they ""spammed"" me with lots of enticements to pay for their advice which seemed just like the type of advice they spoke against.) Anyway, time to put the soapbox away.  As I do that though, I should explain the reason for this soapboxing.  Simply put, investing is a risky endeavor, any way you slice it.  You can never eliminate risk, you can only hope to reduce it to an acceptable level.  What is acceptable is subject to your situation and to the magnitude of your risk aversion.  Ultimately, it is rather subjective and you should not blindly follow someone else's opinion (professional or otherwise).  Point being, use your judgment to evaluate anything you read about investing.   If it sounds too good to be true, it probably is.  If someone purports to have some strategy for guaranteed (steady) returns, be very suspicious of it.  (Read up on the Bernard Madoff scandal.)  If someone is putting on a heavy sales pitch, be weary.  Be especially suspicious of anyone asking you to pay for their advice before giving you any solid understanding of their strategy.  Sure, many people want to get paid for their advice in some way (in fact, I am getting ""paid"" with reputation on this site).  However, if they take the sketchy approach of a slimy salesmen, they are likely making more money from selling their strategy, than they are from the advice itself.  Most likely, if they were getting outsized returns from their strategy they would keep quiet about it and continue using it themselves.  As stated before, the more people pile onto a strategy, the smaller the returns.  The typical model for selling is to make money from the sale.  When the item being sold is an intangible good, your risk as a buyer increases. You may wonder why I have written at length without much discussion of asset allocation.  One reason is that I am still a relative neophyte and have a mostly high level understanding of the various strategies.  While I feel confident enough in my understanding for my own purposes, I do not necessarily feel confident creating an asset allocation strategy for someone else.  The more important reason is that this is a subjective matter with a lot of variables to consider.  If you want a quick and simple answer, I am afraid you will be disappointed.  The best approach is to educate yourself and make these decisions for yourself.  Hence, my attempt to educate you as best as I can at this point in time. Personally, I suggest you do what I did.  Start reading the Wall Street Journal every day. (An acceptable substitute may be the business section of the New York Times.)  At first you will be overwhelmed with information, but in the long run it will pay off.  Another good piece of advice is to be patient and not rush into investing.   If you are in a hurry to determine how you should invest in a 401(k) or other such investment vehicle due to a desire to take advantage of an employer's matching funds, then I would place my money in an S&P 500 index fund.  I would also explore placing some of that money into broad index funds from other regions of the globe.  The reason for broad index funds is to provide some protection from the normal fluctuations and to reduce the risk of a sudden downturn causing you a lot pain while you determine the best approach for yourself.  In this scenario, think more about capital preservation and hedging against inflation then about ""beating"" the market." "Wrong. Business lending has boomed under QE.. does the term ""cov-lite"" sound familiar? That's because there's so much liquidity, that they're willing to lend to companies with little to no restrictions. There is so much credit to go around, that a ""High Yield Bond"" can price at L+800 bps.   When you're taking all the risk of a HY issuer, and maxing your return at 8.5%-9%, it's not too appealing. Instead, you could take a bit more risk, but also get all of the potential upside of equities.   1.  Fed buys assets, injects money into banks.   2.  Banks, flush with liquidity, need to put their balance sheet to use and begin lending to everyone.   2.  Bond market flooded with supply, causes bond yields to drop to historic lows.     3.  Investors don't enjoy limiting upside for incredibly low returns, and begin flooding equity markets to get some sort of yield.    Business lending is booming, making equities the only place to get larger returns." Because stock markets don't always go up, sometimes they go down. Sometimes they go way down. Between 2007 and 2009 the S&P 500 lost over half its value. So if in 2007 you thought you had just enough to retire on, in 2009 you'd suddenly find you had only half of what you needed! Of course over the next few years, many of the stocks recovered value, but if you had retired in 2008 and depended on a 401k that consisted entirely of stocks, you'd have been forced to sell a bunch of stocks near the bottom of the market to cover your retirement living expenses. Bonds go up and down too, but usually not to the same extent as stocks, and ideally you aren't selling the bonds for your living expenses, just collecting the interest that's due you for the year. Of course, some companies and cities went bankrupt in the 2008 crisis too, and they stopped making interest payments.  Another risk is that you may be forced to retire before you were actually planning to. As you age you are at increasing risk for medical problems that may force an early retirement. Many businesses coped with the 2008 recession by laying off their older workers who were earning higher salaries. It wasn't an easy environment for older workers to find jobs in, so many folks were forced into early retirement. Nothing is risk free, so you need to make an effort to understand what the risks are, and decide which ones you are comfortable with. I hate to point to Wikipedia as an answer, but it does describe exactly what you are looking for... The S&P 500 is a free-float   capitalization-weighted index   published since 1957 of the prices of   500 large-cap common stocks actively   traded in the United States. The   stocks included in the S&P 500 are   those of large publicly held companies   that trade on either of the two   largest American stock market   exchanges; the New York Stock Exchange   and the NASDAQ. The components of the S&P 500 are   selected by committee... The committee   selects the companies in the S&P 500   so they are representative of the   industries in the United States   economy. In addition, companies that   do not trade publicly (such as those   that are privately or mutually held)   and stocks that do not have sufficient   liquidity are not in the index. The S&P is a capitalization weighted index.  If a stock price goes up, then it comprises more of the total index.  If a stock goes down, it comprises less, and if it goes down too much, the committee will likely replace it. So to answer your question, if one stock were to suddenly skyrocket, nothing would happen beyond the fact that the index was now worth more and that particular stock would now make up a larger percentage of the S&P 500 index. I am just a C student with no hope for grad school, so you are going to have to walk me through this... The ECB (until recently), Japan, and the Swiss have been running QE programs equal to that of the Fed's in 2009 for the last couple of years.  That's an extraordinary amount of money being created... what's more, is that the Swiss are even buying shitloads of American equities with it.    Perhaps my understanding of M2 is flawed, but how would the Swiss national bank buying $63B in equities change M2?  It's not like the fed is printing the money specifically for the transaction.  The amount of QE being pumped into a healthy economy over the last couple years should be concerning, if only because it's unprecedented, especially since some of it is being directly invested into equities.  I don't think there is a viable argument that can truthfully say that it isn't a pretty large variable in the market today.... but I could be wrong.  Also, I've read enough, and heard enough, on how the inflation rate is measured to cultivate a healthy skepticism for the entire metric. The way they choose baskets, while obviously the best possible, is not something that lends itself to precision.    Please be kind to my grammar.