The Buffett Indicator for 2018

Barring a major market crash, we will most likely enter 2018 in one of the most overvalued stock markets in history. The current market cap to GDP ratio is near 140%

Author's Avatar
Dec 05, 2017
Article's Main Image

With 2018 around the corner, I thought it would be a good time to get started on 2018. Yes, 2018. Where has time gone right? Specifically, I'm wondering where the Buffett Indicator is, what the new portfolio will hold, and what my plans are for not only 2018, but beyond.

Barring a major market crash, we will most likely enter 2018 in one of the most overvalued stock markets in history. The current market cap to GDP ratio is near 140%. Anything over 90% and things begin to get overvalued. At near 140%, you are now in the nosebleed section.

To give you an idea how overvalued the market is, we are nearing levels we haven’t seen since the stock market bubble of 1998-2000 (widely referred to as the dot-com bubble). It was during the dot-com bubble that the Buffett Indicator reached an all-time high of 150%. We aren’t too far away.


What a time to start this project right? But it’s OK. I’m in it for the long haul, and there are going to be market bubbles and market crashes along the way.

With this website comes a brand new “portfolio.” It’s really one low-cost exchange-traded fund (ETF) that tracks the Wilshire 5000, which in itself holds 3,000+ American companies. How much more diversification do you need? Beginning in 2018 it will be small, and if you go by Wall Street standards, super tiny. As in $2,500 small. I’m doing this on purpose to prove a point that a) you don’t need a lot of money to get started in the stock market and b) if you are disciplined with saving and investing, something good is bound to happen over the long haul. Also, keep in mind that this is a super long-term project.

So with the Buffett Indicator near record highs, what’s the plan in terms of purchases?

“Be greedy when others are fearful and fearful when others are greedy.” – Warren Buffett (Trades, Portfolio)

It’s the principle that will guide all purchasing decisions. It’s simple. It makes sense and goes hand in hand with the Buffett Indicator.

With the market overvalued, I plan to keep my purchases small. There is no set percentage as to how much you should allocate for purchases, but anything less than 25% will work when the market is significantly overvalued. You want to build your cash pile up when the market is overvalued in order to make smart and aggressive purchases when the market is undervalued.

How do you build your cash pile up? Via automated deposits. I tried to get in the habit of doing them manually but then discovered your broker allows you to set up automated deposits. As you will see, it doesn’t have to be much. But by automating these deposits, you pretty much automate your portfolio and keep the human element out of it. The only thing you have to do is come to the market every three months, see the Buffett Indicator ratio, make a purchase and leave for three months.

It sounds simple right? It is. Most individuals will not follow it though. It might be too simple. And that’s the main reason most folks will not follow it. Everyone wants excitement. Why invest in one boring ETF that barely moves when Amazon is trading at $1,000 and Bitcoin at 10,000?

Cheers to the journey ahead.

Also check out: