You might enjoy Bogle's latest speech.
[link|http://www.vanguard.com/bogle_site/sp20020612s.html|Here]. He shares much of your caution.
Make no mistake about it, then: It was speculative return that drove the Great Bull Market. The fact is that, based solely on investment return, $1 invested in the S&P 500 at the outset would have grown to $7\ufffda handsome seven-fold enhancement. But the leap in the P/E multiple alone increased that investment return to a market return of $24\ufffdnearly twenty-four times over, 3 \ufffd times (!) the hardly inconsequential investment gain. Yes, we had literally never had it so good.
Can it happen again? I can't imagine how. To understand why, let's take Lord Keynes' advice and look at the sources of the past returns on stocks and then apply them to the decade ahead. Today, the S&P 500 Index yields not 5% but 1 \ufffd%, reducing this key contributor to stock returns by fully 3 \ufffd percentage points. When we add an assumed 6% earnings growth (corporate earnings, truth told, grow at about the same pace as our economy), the investment return on stocks would be just 7 \ufffd% per year. Will speculative return add to or detract from this figure? While the 33% decline in the S&P 500 since the March 2000 high has brought the P/E ratio down to 21 (based on "normalized" earnings at that), that's still quite high relative to the long-term norm of 16 times. So, I think the P/E is unlikely to rise, and could easily decline, perhaps to 18 to 20 times.
[...]
It is hardly farfetched, then, to expect future bond returns that are likely to parallel those of stocks. If so, the traditional 3% equity risk premium\ufffdthe amount by which stock returns have exceeded bond returns over the past century\ufffdmay be far smaller, perhaps even non-existent. There are, of course, those who say that there is some God-given mandate that an equity premium must exist. Yet history tells us that bond returns have exceeded stock returns in one out of every five decades. The reality is that restoring an equity premium to stocks will require either (a) lower interest rates, or (b) some combination of higher earnings growth, higher dividend yields, and lower P/E ratios, which is likely only if there is another downward leg in the stock market. In any event, my view is that we are entering an era of lower returns on financial assets.
His book, "Common Sense on Mutual Funds" is excellent.
I remember the 1973-1974 recession and the stock doldrums that continued for many years. I remember pre-breakup AT&T at $19 and I remember IBM at $40. Stocks and markets go up and down. You're right that equities are still pricey at these levels, but I feel much better about the US markets than about e.g. Japan's. Perhaps foolishly, I'm willing to ride out the current drop in equity values because I'm basically optimistic about the future and because I know that I won't be able to know when to get back in on the way up.
I know you're not a trader, and I know you're not advocating market timing. You're doing what's best for your comfort level and that's what every investor should do. Nobody knows the future and we'll see what happens.
:-)
Cheers,
Scott.
