Don't Over Think The Value Of The Market

One year after the stock market hit its bear market low on March 9, 2009, there's a great debate about whether stocks are overvalued. If you think about it too much, you may end up doing more harm than good to your retirement portfolio.
One of the hard things for people to accept about finance is that it's not subject to much precision. One day you own something that's worth $100,000, and the next day it's worth $80,000 or maybe $120,000; and often there's no way to determine exactly why the valuation changed.
When it comes to the price of the stock market, it's difficult to tell what the correct value is. There are literally billions of pieces of data that influence the valuation of thousands of publicly traded companies; so it's always hard to determine with any degree of certainty whether the market is over or undervalued.
A good example is an article that appeared recently in The Wall Street Journal discussing the competing market valuation theories of Professor Robert Shiller, who sees the market as overvalued, and Professor Jeremy Siegel, who sees it as undervalued. They both have Ph.D.s, they've both written best selling books on their theories, they're both economists at big time business schools, and they both get lots of press coverage for their ideas. So which one is right?
Shiller basically believes that stocks have been expensive for about the last 20 years. Even though we've had two big 50% declines in the last decade, stocks never became "cheap" from a valuation standpoint. And in most prior boom and bust cycles, stocks eventually went through a cheap phase. Since that hasn't happened, he thinks it's likely that stocks are overvalued.
Siegel basically says if you look at current and projected earnings, stocks offer a good value, especially when compared to the low interest rate environment. He thinks the economy will expand at a more robust pace and for the long-term, stocks are still very attractive.
As an investor, how do you deal with this? The problem is that there's no way to prove which theory on market valuations is correct. Yet, you still have to make a decision on how to position your money.
Here's a suggestion. I find that most people gravitate toward the research that supports the opinion they already have about the markets.

• If you feel that the markets are expensive and there are lots of challenges ahead, you probably will find Shiller's research more compelling.
• If you feel like corporate America is poised for a rebound and think the worst is behind us, then Siegel's research may hold more weight.

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