Q: How much importance do you place on the level of the cape ratio when making investment decisions? If one were retiring in the near future with the cape at near record levels. Should they not be concerned about equity returns being low over the next 10 years?
5i Research Answer:
The CAPE ratio often shows markets as being 'expensive' and over time has proven not to be an overly helpful tool. It is another metric to keep an eye on and take into consideration, but we wouldn't use it as a key metric in making portfolio decisions. Valuations have trended higher over time with a big factor being technology becoming an increasingly large part of the index (which naturally has higher growth, margins, and valuations) adn the CAPE ratio has had a hard time 'capturing' this shift due to the 10-year lookback it uses.