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Happy Chinese New Year 2025

S&P 500 Overvaluation: A Critical Look

Are we making a huge mistake by buying ETFs in 2025 while the market hits all-time highs? With the S&P 500 reaching 6,000 points just last month, it’s understandable to think that now might not be the best time to invest in broadly diversified ETFs. After all, stocks seem extremely overpriced at the moment. Should you wait for the inevitable market dip? These are the types of questions every investor grapples with, and the fear of buying at the wrong time can leave many feeling paralyzed. In this video, I want to cut through the emotions and critically evaluate whether investing in ETFs at these elevated price levels is still a smart move.

To set the stage, let's first understand where the market stands as we enter 2025. Historically, the S&P 500, representing the 500 largest stocks in the U.S., has typically risen by about 10% per year on average since its inception in 1957. But in recent years, investors have seen exceptional returns—26% in 2023 and 25% in 2024. As a result, the S&P 500 is now sitting at around 6,000 points, an unprecedented level, making the market look quite expensive.

For context, one key metric I frequently reference is the Schiller PE ratio, which is a more conservative version of the traditional price-to-earnings ratio. Right now, it’s sitting at 38, the second-highest level in history. This means that investors are paying 38 times the average inflation-adjusted earnings of the S&P 500 over the last decade. Historically, this number hovers closer to 17. Another measure, the Wilshire GDP ratio, which Warren Buffett once called "probably the best single measure of where valuations stand," is also off the charts. It divides the total market value of publicly traded stocks by a country's GDP, and when it hits 100%, the stock market is considered overpriced. Currently, this ratio stands at over 200% for the U.S.

On top of market-wide measures, we’ve seen the rise of the "Magnificent 7"—seven tech companies now making up a third of the S&P 500’s weight. The price-to-earnings ratios for these companies range from 25 to a staggering 110, which is highly unusual. Looking at Stake’s most traded stocks in the past month, it’s clear that speculation is fueling this rise, with Tesla, Nvidia, MicroStrategy, and Palantir taking the top spots.

So, it’s clear the market is quite hot right now, which understandably leaves investors wondering whether they should buy in at all. Many hesitate to jump into these markets due to the fear of a correction, and I’ve seen this hesitation firsthand in my own investing experience.

Should We Just Wait?

Even though your instincts might tell you that a market correction is right around the corner, statistically, that might not be the case. Take a look at 2016-2017, when I was diving deep into understanding investing. There was a lot of talk back then about how expensive the market was and whether a correction was coming. You can find headlines like these from that time:

• Yahoo Finance: "The S&P 500 is historically overvalued"

• CNBC: "Any way you look at it, the stock market is overvalued"

• Goldman Sachs: "S&P 500: Overvalued"

• Most Retail Buyer: “What is Bubble? This will 10x Soon“

And even Forbes was warning people to avoid S&P 500 ETFs, saying there were four reasons to stay away. But, guess what? If you had followed that advice and pulled out, you would have missed out on significant gains. The S&P 500 kept climbing through 2018 and 2019, only being temporarily affected by the COVID crash in 2020. If you had avoided the market back then, you would have missed a 20% return on your investment. And, while you could have jumped back in after the COVID dip, the point is that the market continued to grow despite all the negative warnings.

This pattern has repeated itself in recent years as well. We've been bombarded by media reports about inflation, interest rates, supply chain issues, geopolitical tensions, and fears of recession. According to the media, global stock markets should have been crashing, yet the S&P 500 keeps moving upward. This brings us to the central question of the video: Should you try to time the market?

Honestly, I don’t know anyone who’s successfully timed the market. And I’ve never met anyone who knows someone who has either. While I’m no expert, in my experience, market timing is a fool's errand. The reason for this is simple: markets can stay irrational for long periods of time. Often, market movements defy logic, and while it might seem obvious that the S&P 500 should correct soon, who’s to say that will actually happen? Even Warren Buffett, widely regarded as one of the best investors in the world, has said many times that he has no clue where the market is headed in the short term.

As he put it: "We have the faintest idea what the stock market is going to do when it opens on Monday. We’ve never made a decision based on what the market or the economy is going to do in the short term." So, despite all the predictions and speculation, the truth is no one knows what’s coming next. And because of that, investors should be cautious about trying to time their moves based on short-term market fluctuations.

Chart depicts performance 2024 of the S&P 500 overall and by each of its 11 sectors thru 12/31/2024.

The Simple Strategy to Avoid Market Bubbles

I've come up with a clever way to still benefit from the market's long-term growth without needing to predict the best times to buy or sell, and it’s called dollar-cost averaging. The concept is simple: commit to investing a fixed amount of money into a market-tracking ETF at regular intervals, regardless of the market's current condition.

When the market is high, your set amount buys fewer shares, and when the market is low, it buys you more. Over time, this smooths out your purchase price to the market average. This strategy has consistently outperformed active stock picking. In fact, the SPIVA scorecard reveals that globally, the experts who spend all their time picking stocks almost always underperform the market. Over the last decade, only 15% of actively managed funds have beaten the S&P 500, which shows just how effective dollar-cost averaging can be.

Many brokers now make dollar-cost averaging more accessible than ever.

For example, the broker I use in Singapore, Tiger—has introduced a recurring investment feature. This lets you set up and forget a dollar-cost averaging plan with a market-tracking ETF that fits your needs. If you have a Tiger account, you can set up recurring deposits from your bank into your brokerage account and then create recurring investments when you buy your ETF of choice. This makes it easy to build the habit and stick to the strategy.

In short, the popularity of dollar-cost averaging is on the rise globally, not just in Singapore. Investors are starting to recognize the long-term wealth-building power of market-tracking ETFs and how they can protect against market downturns.

Let’s consider an example of dollar-cost averaging where you invest $11,000 into an S&P 500 index fund like SPY every 3 months—starting at one of the worst possible times, right before the global financial crisis. Your first $1,000 investment was made in October 2007, just before the market crashed. The interesting part of this strategy is that it naturally buys fewer shares when the market is high and more shares when it’s low. Even though you started at the peak, by January 2010, your portfolio would have been in the positive, thanks to the strategy's inherent ability to take advantage of market dips.

The most important takeaway here is that this strategy helps you build a consistent investing habit, allowing you to benefit from the market’s typical trends in the years following.

Now, back to the original question: Are we making a mistake by buying ETFs in 2025? The answer is unclear, but this video hopefully shows that if you’re following a long-term, passive investing approach, it doesn’t really matter. While no one knows what the market will do next, history shows that dollar-cost averaging works well to weather the bad times and capitalize on the good times. That’s why it’s such a solid strategy for long-term investing.

The Real Data You Should Consider

Statistically, every year is more likely to be a good year for the market than a bad one. Take a look at this chart from First Trust Advisors, which shows S&P 500 returns from 1926 to 2019. While it doesn’t include the last 5 or 6 years, it still offers a solid visual of the market's ups and downs. Yes, there are occasional down periods, like the crash in 2008, but overall, the market has trended upwards far more often than it has declined. This is an encouraging statistic for those who approach investing with a long-term mindset.

That said, it’s important not to overlook the challenges we face today—higher interest rates, persistent inflation, geopolitical tensions, and so on. These factors are real, and if I were a day trader, I’d likely be cautious about investing in 2025. But for long-term investors who follow a passive investing approach, there's much less to worry about. Instead of stressing over what might happen in the next year or two, we can focus on the broader picture—where the market will likely be in 10 or 20 years.

And honestly, this is one of the key reasons why passive investing has gained so much popularity in recent years. There’s a fascinating statistic: more money is now invested in passive products than in actively managed ones. In fact, passively managed mutual funds recently reached a combined $13.29 trillion—an indication of how many investors are choosing to take a hands-off, long-term approach to building wealth.

The ETF Issue Ahead

I hope this article has helped answer the question of whether we should avoid ETFs in 2025—and the answer is no. However, there’s one more thing I want to touch on before I wrap up: Not all ETFs are created equal. As ETFs have grown in popularity, we’ve also seen the rise of thematic ETFs, which are quite different from traditional market-tracking ETFs like those that follow the S&P 500.

Thematic ETFs focus on specific sectors or trends. For example, you might find a Bitcoin ETF that tracks Bitcoin, a healthcare ETF that invests in healthcare companies, or a bond ETF that holds bonds. As ETFs gained traction, providers began offering products for just about everything. The issue here is that many of these thematic ETFs aren’t aligned with the passive investing strategy we’ve discussed.

It's important to remember that ETFs became popular because they were a great tool for passive investing and market tracking, particularly when combined with strategies like dollar-cost averaging. They didn’t become popular as a way for people to gamble on specific stocks or sectors. So, if you start diving into thematic ETFs, you're essentially moving away from passive market tracking and back toward active investing—an approach that, as the data suggests, typically underperforms over time.

Of course, I’m not here to tell you what to do with your money, but it's definitely something worth considering. Many passive investors are now falling into this trap, attracted by the sheer variety and availability of ETFs. There are now thousands of different ETFs out there, but the reality is, you probably only need a handful to build a solid portfolio—maybe even just one, like an S&P 500 ETF.

That said, I hope this update on ETF investing in 2025 was helpful.

Before you go, leave a comment and let me know: What are your thoughts on the passive investing strategy? How do you feel about buying ETFs in 2025?

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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