Q. Are stocks too expensive right now?
A. It depends on your perspective.
One common measure of stocks is Price to Earnings ratio (PE). If PE is high, you can say the stock is "expensive". But in reality, it's really not that simple.
PE has two components: Price and Earnings per Share. While Price is about present and easy to get, EPS is about future, which is incredibly hard to predict.
Let's use S&P 500 index as an example to illustrate:
Current S&P 500 index PE is 16.7, which means you will need to pay $16.7 for every dollar of S&P 500's profit. Is it expensive?
You might say yes if you know 16.7 is higher than the average over the past century; but you might say no if you know 16.7 is still at a 5% discount to the average PE over the past 15 years.
Does 5% discount to past 15-yr average represent a buying opportunity? Well, that again depends on your geographical perspective.
For example, European equities are trading at an 18% discount to their past 15-year average PE, sounds cheaper, right? But wait, the emerging markets are even cheaper because their PE is at a more than 20% discount to its past 15-year average.
If you believe the European market and Emerging markets are cheap and want to add them to your portfolio, you can consider Vanguar'd FTSE European ETF (VGK) and iShares Emerging Markets Dividend ETF (DVYE).
A. It depends on your perspective.
One common measure of stocks is Price to Earnings ratio (PE). If PE is high, you can say the stock is "expensive". But in reality, it's really not that simple.
PE has two components: Price and Earnings per Share. While Price is about present and easy to get, EPS is about future, which is incredibly hard to predict.
Let's use S&P 500 index as an example to illustrate:
Current S&P 500 index PE is 16.7, which means you will need to pay $16.7 for every dollar of S&P 500's profit. Is it expensive?
You might say yes if you know 16.7 is higher than the average over the past century; but you might say no if you know 16.7 is still at a 5% discount to the average PE over the past 15 years.
Does 5% discount to past 15-yr average represent a buying opportunity? Well, that again depends on your geographical perspective.
For example, European equities are trading at an 18% discount to their past 15-year average PE, sounds cheaper, right? But wait, the emerging markets are even cheaper because their PE is at a more than 20% discount to its past 15-year average.
If you believe the European market and Emerging markets are cheap and want to add them to your portfolio, you can consider Vanguar'd FTSE European ETF (VGK) and iShares Emerging Markets Dividend ETF (DVYE).
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