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ETFs to blame for high valuations?

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MarketWatch doesn’t seem to think so, but I would disagree.  I recently got a newsletter from a hedge fund manager, Whitney Tilson, who indicated that he believes ETFs have made it easy for novice investors to pile into the market, based solely on their optimistic feelings.  I would tend to agree.

In the 1920s, it was the influx of retail money into the markets that drove it to sky-high valuations.  The new boom and the optimistic time of the 1920s enticed people, who knew nothing of stocks or business, to dump their money into the market, like their neighbor did.  It was easy as a phone call back then.

Now it’s as easy as a click.  And Fidelity doesn’t even charge a $4.95 commission for a sponsored slate of ETFs, so people view it as a “free trade”.

Buyer beware…if you are starting to invest, take it slow.  Nobody can predict the market direction.  Divide your money into 36 equal chunks and commit one chunk per month into the market, so that if the eventual correction does come, you can dollar cost average into it.

Investors have poured tens of billions of dollars into U.S. stock-based exchange-traded funds of late, with industry assets hitting bigger and bigger records. Investors have also driven U.S. stock prices to high levels, with valuations by one metric at their highest level since 2004. A potentially trillion-dollar question is, are the two trends related?

Source: Don’t blame ETFs or passive investors for high valuations