Prudent Investing as of August 2025
The U.S. stock market, as represented by the S&P 500 appears, very clearly, to be both over-valued and over-concentrated in the highest flying stocks (particularly the magnificent seven).
The trailing year price to earnings ratio on the S&P 500 is 28.7 and the P/E based on forecast earnings in the next year is 25.0. This is based on actual income statement earnings. The figures based on “operating earnings” which eliminate certain non-recurring losses are moderately lower (more attractive) at 26.7 and 23.0. By either measure the S&P 500 is trading at a multiple of earnings that is far above historical averages and towards the high end of its historical range.
The high valuation if the S&P 500 in relation to its earnings might suggest that investors should steer clear of the S&P 500 or at least sharply reduce their exposure to it. But the S&P 500 has appeared to be clearly over-valued in relation to earnings for the last ten years. Any “corrections” to a lower valuation during that time such as early 2016 and the pandemic panicked Spring of 2020 proved to be short-lives. Avoiding the S&P 500 due to a high P/E ratio has, at least so far, proved to be mistake.
Nevertheless, investing in stocks at todays high valuations presents a risk.
A prudent and proven strategy is to diversify and hold about 40% of investments in safer fixed income including an allocation to cash to provide stability and the cash to take advantages of bargains if they arise.
Everyone’s situation and risk tolerance and risk capacity is different. Some investors may want to allocate more like 60% to safer investments. But almost all investors should include some allocation to equities.
It’s difficult to say whether the S&P 500 and by extension the Toronto Stock Exchange will suffer a major pull-back anytime soon. A key variable to watch is the the yield on the 10 year U.S. treasury bond. It’s currently 4.3%. A rise towards the 5% or higher level would be quite negative for stock (and home) valuations. This could occur if there is a loss of faith in the economic policies of the United States (including the tariff policies) or in the event of major negative international developments.
The easiest way to achieve a balanced and globally diversified portfolio is to hold a balanced Exchange Traded Fund or even a Balanced Mutual Fund.
Get in the Game
Investor do rightly worry about stock market valuations. Portfolio losses are painful even when they later prove to have been temporary.
But investment risk is not a good reason to avoid any exposure to equity investments.
Equity investing is a lucrative positive sum game over the long term as money flows from customers of businesses to the investor owners of businesses. And investors need not feel guilty about this. Businesses in general earn their profits fair and square by adding value. In most cases both consumers and businesses benefit.
Equity investors can indeed mess up by taking excessive risks. But it is dead easy to achieve a fully balanced and diversified portfolio. Deviations from that should be done judiciously with an understanding of the risk as well as the potential reward.
Given that investing has historically proven to be a positive sum game and that there are logical reasons for that to be the case (profit inflows from consumers to business owners), the key action point is to get in the game. And the earlier in life and the deeper into it, the better.
One of my goals is the help non-investors get in the game.
For Canadian Investors see my article on how to get started with as little as just one Balanced Exchange Traded Fund.
First Home Savings Account
After the Tax Free saving Account (TFSA) was introduced it became debatable whether it was a better way to invest than the RRSP which offered immediate income tax savings but where withdrawals would ultimately be taxed.
Then in 2023 the First Home Savings Account became available. For potential first-time home buyers it offers the best of both worlds. A tax deduction for contributions, tax free growth, and no tax payable when the funds are ultimatley used to purchase a first house!
For young people planning to purchase aa first home in the five or even fifteen years this new account is a gift and a “no-brainer). An employed Canadian or couple who purchase a first home in the next few years would be “throwing free money away” if they fail to use this new account.
Click here for my article that explains this account in detail.
Stock Picks
Our stock picks have continued to do well on average. Our focus on preferred shares that got very cheap in 2023 worked out particularly well. At their discounted prices at that time these were low-risk investments and they delivered not only their promised attractive yields but strong capital gains. Our Stock Picks are available at a modest subscription price of $15 per month and $150 per year and includes short daily market comments. And won’t bombard you at all with emails. Subscribers login (usually daily) to check for updates adn the daily comment. Click here to Subscribe.
Feedback is welcome at shawn@investorsfriend.com
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Shawn Allen
Investorsfriend Inc.
August 18, 2025
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