The honest version of the valuation argument#
There’s a real signal in there, so let’s state it fairly.
High price-to-earnings ratios genuinely do correlate with lower returns over the following five years. That relationship holds up. If you buy when multiples are stretched, your next half-decade is likely to be worse than average.
Here’s what makes it nearly useless as a decision rule: over any 20-year period, US stocks have not produced a negative real return once dividends are included, and by 30 years the outcomes converge tightly. So a high starting multiple shifts your five-year experience and washes out over the horizon most people are actually investing across.
Which means “the market looks expensive” is simultaneously true and not actionable. Unless you’re spending the money within five years — in which case it shouldn’t be in stocks anyway.
The practical conclusion is unglamorous: just keep buying. Market high or market low, same amount, same day of the month. Not because timing never works, but because the version of timing available to you — noticing that things feel expensive — has no demonstrated edge.
What compounding actually looks like#
The reason patience is worth this much is that returns are wildly back-loaded.
Start with $5,000, add $1,000 a month for 30 years at 8%, and you finish near $1.5 million — having contributed $365,000 of your own money, with roughly $1.18M as growth. At $2,000 a month it’s about $3M.
Look at where that growth lands. The overwhelming majority arrives in the final third, because that’s when the compounding base is largest. Which explains why quitting during a bad decade is so destructive: you eat the flat part and then leave before the payoff. The people who do well here aren’t smarter, they were present at the end.
Stocks earn this patience. Over the past century they’ve beaten bonds, gold, real estate and art — real estate lands roughly tenth on that list, which surprises almost everyone who assumes property is the reliable wealth-builder.
A portfolio you can actually leave alone#
For most people the whole thing is three funds: a US stock index, an international stock index, and a bond fund. A reasonable split is 60% US / 30% international / 10% bonds, adjusted for how long you’ve got.
Set your allocation once from your risk tolerance and time horizon. Long horizon, more equities, ride out the volatility. Short horizon — a house deposit in two years — that money isn’t in the market at all.
If you want individual stocks, keep them a minority and hold five to ten across different sectors. Ten tech stocks is one bet wearing a costume.
And when you research them, five numbers do most of the work: revenue, net income, P/E ratio (compared only against companies in the same sector — a 38 and a 53 mean nothing next to each other across industries), price-to-sales for companies not yet profitable, and free cash flow. Note banks routinely show negative free cash flow for structural reasons, so don’t apply that one blindly.
The tax rules worth knowing, and not obeying#
You owe nothing until you sell. Sell within a year and gains are taxed as ordinary income; hold past a year and it’s the long-term rate — roughly 15–20%, and 0% under the income threshold. Often close to half the bill for waiting a few days.
Tax-loss harvesting is the other lever: realised losses offset realised gains, so a $4,000 loss against $10,000 of gains leaves you taxed on $6,000.
But don’t let the tail wag the dog. Profit is profit, and people hold deteriorating positions for months to reach a date on a calendar. The exception worth respecting is a large gain a few days short of the one-year mark.
The cleanest answer is to sidestep it — inside a Roth IRA none of this applies, because the growth is tax-free. The 2026 limit is $7,500 ($8,600 from 50), and it’s the single highest-value account most people can open.
So what to actually do#
- Set an automatic monthly purchase and never pause it for valuation reasons. That’s the whole strategy.
- Fill the Roth IRA first, up to $7,500 — tax-free growth beats every optimisation below it.
- Pick a three-fund split once, write down why, and rebalance annually at most.
- Cap individual stocks at a minority of the portfolio, spread across sectors.
- Compare P/E within a sector only. Across sectors it’s noise.
- Hold past twelve months where you can, and otherwise ignore taxes when deciding.
Sources & further reading#
- Just Keep Buying — Nick Maggiulli, Of Dollars And Data — the data behind consistent buying beating attempts to wait for better prices.
- Does Market Timing Work? — Charles Schwab — twenty-year evidence that waiting costs more than bad timing.
- 401(k) and IRA contribution limits for 2026 — IRS — the $7,500 IRA cap and $8,600 catch-up.
