I recently had a call with a client of

mine, Mark, who said, "James, I've just

received a bonus, and I'm not sure what

to do with it. Normally, I would have no

problem investing, but right now, yeah,

Trump is being Trump, but what really

concerns me is how high the stock market

is. With what I'm seeing online, we're

in an AI bubble with reliable warning

indicators suggesting that future

returns are likely to be poor. I'm only

5 years from retirement, and with

everything that's going on in the world,

is this really a good time to be

investing?" Now, I know I'm not the only

financial adviser to have got a call

like this recently. Specifically, what

Mark had been seeing online is that

compared with the past, stock market

valuations look extremely high. This is

the Schiller Cape ratio for the S&P 500,

which is a commonly used indicator for

assessing how expensive the stock market

appears to be. And on this measure, US

valuations are back up to where they

were before the dotcom bubble burst.

After which it took 12 years for the US

market to recover back to its previous

high in pound terms. That was one event.

But more broadly, if you look back in

time, periods that started with a high

Schiller PE ratio have on average gone

on to produce significantly lower

returns over the following 10 years. So

on one hand, Mark is seeing data like

this, which clearly does not look good,

but what's making him even more

concerned is the narratives that come

with it. The big narrative of 2026 is

AI. We have a small handful of tech

companies spending hundreds of billions

of dollars building out data centers and

infrastructure for AI through a complex

web of deals that makes it seem like

they're just passing revenues around

between each other. Money is being made,

but it looks like the people who sell

the shovels are just selling them to

each other. The question is whether

there's actually any gold. Is this

spending actually going to turn into

practical applications and profits

anytime soon? If they don't, the fear is

that markets have got so far ahead of

themselves that they'll have to come

back down to earth in a big way. This is

the narrative that had really got its

teeth stuck into Mark. And with what

we've just seen, it's easy to see why.

But what if I told you there's other

explanations? Clearly, by this measure,

valuations are much higher than they

have been in the past. But can you see a

trend here? Since the 1980s, valuations

have continually been drifting higher

and higher. And what if that's

representative of structural changes in

the stock market? That means higher

valuations are here to stay. Over this

period, financial literacy and access to

stock markets has increased

dramatically. There's hundreds of

millions more people who understand the

importance and the the reassuring mass

that sits behind long-term investing. I

mean, this channel is a prime example of

that. And with the advent of apps and

index funds, investing is easier than

ever before. With more and more money

flowing into the markets, this could be

pushing up prices. And think about this.

Since the great financial crisis of

2008, we've seen the Federal Reserve and

other central banks and governments prop

up stock markets in ways we've never

seen before. Bailing out banks, buying

assets, providing liquidity when it's

needed. And the knowledge that central

banks are willing to step in may be

acting like an insurance policy, making

markets inherently less risky and

perhaps deserved higher valuations.

Since the 1980s, we've also seen another

fundamental shift that has reduced risk

for businesses. Back then, defined

benefit pensions were the norm, where at

retirement, companies would pay an

employee a guaranteed income for the

rest of their lives. These were often

extremely generous and put the onus and

the risk of saving for an employes

retirement on the business. So, if the

business did not save enough or invested

poorly, they either had to pay more into

that pension scheme or go bust, as many

of them did. But over the last 40 years,

we've seen a fundamental shift away from

defined benefit pensions to defined

contribution schemes, which are

typically much cheaper for companies and

put the risk of investing and retirement

on the employee. It's really hard to

stress just how big a liability to find

benefit pensions were for companies back

then. But today, S&P 500 businesses are

largely free of those risks. So, that's

three trends there that could be behind

a structural shift towards higher

valuations. And who knows when they'll

stop. They could be providing a tailwind

to markets for decades to come. Now, I

wanted to tell you this to show you that

there is always another narrative,

another way of looking at the same data

and how convincing a smart sounding

narrative that appeals to common sense

can be, especially when it comes from

someone like me who has a big platform

on YouTube. I guess the only thing that

damages my credibility is the fact that

it looks like I'm in a basement right

now. But the truth is that I don't know

if these factors are actually making

meaningful differences to valuations

right now. Maybe they are, maybe they're

not. Now, don't worry. In a second, I'm

going to tell you what I really think

about these high valuations and the

exact advice I gave to Mark. But I just

wanted to make this point to demonstrate

the power of a good narrative and how

easily it can affect our perspectives.

These days with index funds, getting

invested is easy, but staying invested

is a lot harder, perhaps harder than it

has ever been. Because not only are

there a million smart sounding, emotion

hacking narratives on social media, but

the algorithms are built to push the

most extreme view. And the more you

click, the more you get until you get

stuck in an echo chamber where any story

can feel true. Whenever I see a comment

on YouTube from someone saying, "I'm

selling all my US stocks. This is 2000

all over again." or I'm all in on gold.

Fear is dead. My first thought is what

content have they consumed to push them

to that point because no one wakes up in

the morning thinking this stuff. That's

a narrative that they have absorbed from

somewhere else, from someone else whose

incentives might not be clear. Stock

markets are notoriously hard to predict.

So, if you ever find yourself feeling

certain about what's going to happen

next, you need to take a step back,

audit the content you're consuming, and

deliberately go and find a different

perspective because there is always

another side to the story, which is

exactly what I wanted to show Mark.

According to the Cape Ratio, US stock

market valuations are high right now.

And in the past, there has clearly been

a relationship between cape ratios and

subsequent returns. But the question we

need to ask then is can we use high

valuations as a reliable signal to get

out of the market. As you can imagine

given the number of people looking for a

reliable way to time the market there is

a lot of research looking at exactly

this. In one 2017 paper, they looked

back at over a 100red years of stock

market data to assess the performance of

a simple buy and hold strategy invested

in US stocks to a systematic strategy

which varied its stock market exposure

from a minimum of 50% stocks and 50%

cash to 150% stocks by using leverage

when the cake was low. And they thought

this would work well, but the results

were mixed. Between 1900 and 2015, the

buy and hold strategy produced an excess

return above cash of 6.6% per year on an

annualized basis, whilst the timing

strategy achieved a 7.4% return, which

may sound better, but the timing

strategy was more volatile to the extent

that the risk adjusted returns, which is

the important part, were almost

identical. However, over the second half

of this period from 1958, these two

strategies were pretty much identical in

terms of return and riskadjusted return.

Now, when looking back over the full

period, not only were these differences

in return not statistically significant,

but these figures are gross of fees when

in reality the timing strategy would

have had trading and margin costs which

have not been factored in here. Given

the apparent link between cape ratios

and subsequent returns, this is a

puzzle. The explanation that the authors

gave was that the problem with valuation

timing strategies is that valuations can

drift higher or lower for years or

decades, making it difficult to

categorize the current market

confidently as cheap or expensive

without hindsight, which speaks to

exactly what I was talking about

earlier. Because valuations have drifted

higher and higher over the last 40

years, any timing strategy calibrated on

what's happened in the past and what was

normal before would have given premature

signals to get out of the market. So the

takeaway is that in the short term, no.

Cape is not a reliable indicator as to

when to get in or out of the market. And

if you want recent evidence of that,

just look at what's happened since 2022.

The last time the Cape ratio was this

high. Since then, the S&P 500 is up 43%.

Although Cape can't tell us what is

going to happen in the short term, it

does appear to have some predictability

over long time periods. We're talking 10

plus years. So if the market seems

expensive, and again it's hard to assess

what expensive means, but if that seems

to be the case, it's sensible to assume

that stocks will deliver a smaller

premium above cash and other lower risk

assets than they have done in the past.

But with that said, although US

valuations look high right now, that's

not the case for much of the rest of the

world. The UK is trading at valuations

lower or on par with the past, as is

Europe. With all of the research my firm

has done, we've not seen evidence of any

reliable way to time when to get in or

out of the markets or switch between

countries. So, as I said to Mark, we

need to focus on what we can control.

Firstly, diversification. Mark, this is

why you are not invested in a single

country. You're invested across the

world in big companies, small companies,

tech, healthcare, energy, the lot. And

although cape ratios can't tell us

what's going to happen in the short

term, in the long term, there does

appear to be some predictive ability.

So, it makes sense for us to assume that

a globally diversified portfolio of

stocks will deliver a lower premium than

it has in the past. Which is exactly why

when we've built your financial plan, we

did not assume that stocks are going to

deliver 10% returns per year. We stress

tested the plan using conservative

assumptions. And the good news is that

even with those, your plan still works.

And for this bonus, when it comes to

investing a lump sum, it is so easy to

get caught up in the narratives that you

read online. But again, we need to focus

on what we can control. Although you're

planning on retiring in 5 years, we've

already started to set aside money in

lower risk assets for that eventuality.

So the vast majority of your money,

including this bonus, is going to need

to remain invested for the next 10, 20,

30, hopefully 40 years. So the question

we need to ask is not what are the

markets going to do over the next few

months or years because the honest

answer is no one knows. What we care

about is where it's likely to be 20

years from now. And because you're

investing across the entire globe,

you're not betting on a single country

or sector, you're betting on the

continued growth, prosperity, and

ingenuity of the human race. And despite

the negative narratives you hear online,

that's not something you should bet

against. Now, for anyone, even seasoned

investors, investing a big chunk of

money can be nerve-wracking. No matter

what your head is saying, when your

finger hovers over that button, your

emotions can easily get the better of

you. So what we decided to do in Mark's

case, and I don't recommend this for

everyone, but because Mark was feeling

nervous, we decided to systematically

phase the money into the markets over a

period of 6 months. Not because we think

it's going to deliver a better return.

In fact, the chances are that it won't

simply because markets tend to go up

more than they go down. But just in case

markets do fall straight after we start

this, it's easier for Mark to then view

that as a good thing as he gets to buy

in at a lower and lower price. And then

on the flip side, if markets do rise,

yes, he's buying in at a higher price,

but because he's already got a lot of

other money invested in the markets, you

know, that's a good news story, too.

When I first started investing, I can

remember that markets were at an

all-time high. And I was thinking surely

markets are going to fall below where

they are now at some point. So why don't

I just hold on to my cash and then buy

in when they're lower. At the time it

felt so intuitive. But of course I ended

up sitting there in cash whilst the

markets just went on higher and higher

and higher. And this is something that I

expect most investors can relate to.

It's probably something you've done at

some point. So, a few years ago, I

decided to do some research, looking

back into the past at whether it's been

more likely for stock markets to fall

after setting an all-time high on that

particular trading day compared with any

other normal trading day where it's not

at an all-time high. And all I can say

is that you're going to need to watch

this video here because I was shocked by

what I found. I'll see you there.