Predicting the future is obviously imperfect, but there's no particular reason to rule out investors realizing one day that stocks in all the "normal" companies are actually worth only half of what they were selling for the day before. It has been a long time since there was a major downturn in the market, but it is almost guaranteed that there will be another sooner or later.

Yeah, just over a year ago. Seems like ages!

A simple way to think about this: everyone in society has a portfolio of assets, they allocate to that portfolio based on risk/return/liquidity/etc, and the most important ratio here is cash to assets.

At this stage in the cycle, perceived risk is very low, expected returns are very high (some of the stuff you read on this is next-level crazy, ppl saying they are guaranteed a double digit real return from equities), and so no-one wants to hold cash...any cash. They hold very low levels of cash relative to total assets.

At some point, this will change. Cash % of assets is basically stationary (to some extent, the mean % has probably trended down this decade slightly though). Large-scale fraud will lead to a re-examination of the relative reward of assets, actual losses mean that your ratio of cash to assets drops, and people sell to either increase liquidity/panic/etc.

Bubbles sometimes deflate slowly, most often they do not because people aren't rational. If you buy into a stock expecting to sell it someone else at a greater price, what do you do if you wake up one morning and it is down 20%? You get out. There is no reason to hold it. You can't earn fundamental value at that price. This is happening in multiple stocks, margin calls, brokers start liquidating client portfolios en masse...you get the picture.

Ok, so I have to hope that the guys managing my 401K act more rationally, e.g. slower to jump on these stocks and slower to get out of mainstream assets. I guess that's not guaranteed but I would hope they know better than to invest in this deli.

No. If anything, they are going to be more irrational. The incentives for most advisers are horrible.

Ymmv, if you have a good adviser then great. But I used to work in this area, and even in my first real job (not my first job in the industry though) the level of ignorance was brutally obvious.

For example, my first employer was a single adviser firm that just got acquired for $5m...this guy didn't know how to use Excel, he didn't know how to build a financial forecast, he didn't understand that life expectancy at birth was different to expectancy at retirement, he didn't understand basic elements of finance (for example, why you can't make money buying a stock and selling after they pay a dividend), he didn't understand how to compute returns, and falsified those numbers in marketing when they showed bad performance...and this is a guy who has hundreds of clients, and $100m+ in assets. However bad you think it is, it is much much worse.

Most of the people on here will do better if they apply a little time, and understand that human reasoning is flawed (i.e. don't get swept in the hot new thing). That is all that is required.

Scary! I'm still 8-10 yrs from retirement but most of my funds are in target-retirement-date type funds with lower risk. This latest round of news stories and conversations like this motivate me to look at what actual stocks I own. I can totally relate to the irrational exuberance - I look at how well my investments have done through the pandemic and expect things to get "even better when the economy wakes up again" but that could be totally wrong.

Target date funds are least bad...if they are composed of ETFs. It isn't worth looking at individual stocks. If you want another layer of diversification: add a different asset class (for example, more bonds), or add more geographical exposure. This isn't advice of course, so be careful to understand how any change has impacted performance in the past (it isn't always a good guide but it is better than nothing).

I think they were more asking about target date funds at major institutions like T Rowe Price, Fidelity, Vanguard, etc. But that's a hell of a story.

Did you report them to finra?

Not in the US. Unbelievably, there aren't specific rules against falsifying returns if you are careful with how you present them (for example, the CFA, the main accreditation for fund managers, just has a "code of conduct"...ironically, the guy who is the director of conduct on the CFA board in my country used to steal from employees). This guy didn't actually know this, he just didn't understand how to construct returns, and made "adjustments" until the number was right. His only real area of knowledge was complex, high-fee insurance products, he knew nothing about actual investing (he used to work as a captive salesman at an insurance company).

Again, investing in passive index funds avoids most of the deli-style shenanigans. More policy based decision making, less judgment calls.

Many stocks would actually lose half their value if they go back to their value from a few months ago.

There haven't been very many good places to invest capital during the pandemic, so most of the money floating around has gone into the stock market. As the economy opens up, there will be more and better opportunities to invest huge sums of capital outside of the market. That will naturally lead to devaluation in the market, and, potentially, a rather large "correction."

The average S&P 500 stock is up nearly 70% in the last 12 months.

A return to March 2020 would be a loss of close to 50%.

In March 2020 they were down 30% from the peak a month before. There was a virus. You may have heard about it? It was in the news. :) People didn't know what was going to happen.

Previous peak to present might be a less misleading factoid. And that is +20%. Still a big number but less impressive. It may be that confidence in public markets was bolstered by the resilience of the big companies' profits in the face of the virus.

+23% peak to peak actually.

Ok you want a longer period? it’s up nearly 70% from start of 2019, and it’s PE ratio is among the highest in its history.

You picked another trough as your baseline. Only up ~40% since Oct 2018. Still two very big years -- double the long run historical average -- but also a good deal less sensational than the numbers you're pulling out.

For what it's worth, a look at the annualized returns chart for the S&P500 might be interesting. https://www.macrotrends.net/2526/sp-500-historical-annual-re... Those green bars on the right don't look tremendously out of place compared to past years. What's really different from previous decades is not the rate of growth but the lack of financial market downturns. Hard to say if that means we're ramping up to "the big one" or if we have fundamentally figured out how to better run the economy so that we have fewer downturns.

Record low interest rates have a lot to do with it. If they rise significantly that 38 PE will get slashed a great deal.

Right, the question is whether the record low interest rates will actually need to be slashed at all. We are seeing some inflation in some sectors -- lumber, computer hardware, probably other things I'm not mentioning. But it's not clear whether this inflation is from supply shocks, displaced consumption due to COVID, or monetary issues. I mean, it's all three, but it's not clear how much of the responsibility lies with each cause.