Volatility is a integral part of the stock market. It is on days like these that we are all reminded of this fact. In actuality, the stock market has done well in the past year. The Dow Jones Industrial Average reached an all-time high of 12,845 only last week. The other major indices (S&P 500 and Nasdaq) have also posted respectable gains over the past year. For the Dow, this new high was followed by a drop of 416 points in one day.
What is a warning sign that the stock market is overvalued? In a word: exuberance. In the past few months, we have seen a constant growth of optimism among financial professionals and analysts. This optimism extends into the realm of personal finance blogs as well. Recently, there seems to be a constant new crop of enthusiastic new PF bloggers out there. Over the past few months, some bloggers have been writing that their portfolios have increased by 4-7% per month. These are quite impressive numbers indeed!
I can't help but get the feeling of deja vu when I compare what is happening now to the hi-tech (dot com) boom of the late 1990s. One blogger, who admits to not having a stock picking philosophy, tell us that he will turn $100k into a cool million over the next ten years. Another blogger scaled back the initial estimate of his net worth growth rate to only 30% per year. Even so, he'll be a millionaire in a little over 4 short years.
Early on in this blog, I wrote a post about me. In that post, I said that I feel the economy is much better now than it was in 2002. But I've learned not to get too overconfident, and to plan for the worst while hoping for the best.
In fact, during the last few months of 2006, I had sold off much of my stock holdings. And I found it very difficult to find new investments to buy. These are the ones that I think have a much greater chance of going up rather than of going down. While there are some exceptions, I think that most stocks are overvalued at this time.
Note that these are my views on the stock market. But regardless if the market goes up or down, it does not make me feel nervous or worried. Indeed, it used to. I imagine that most people who are invested in the stock market would feel a little queasy these days. But I now feel that either direction presents a new, different set of opportunities.