It always helps to avoid long positions in any extremely overvalued sectors of the market. From time to time, every investor should compare the relative valuations of various market indexes to identify the overvalued sectors.
I was going through the P/E ratios of all Vanguard stock index funds to find out which index fund is currently fielding the highest P/E ratio. I looked at every blend, Growth and Value indexes but nothing significant jumped out. In other words, I did not find anything unexpected.
Until, I looked at the P/E ratio of the Vanguard REIT Index Fund (Symbol: VGSIX). The P/E ratio of VGSIX is 38 as of 3/31/2005. No, that is not a typo. It is 38. Thirty Eight.
The Vanguard REIT Index Fund tries to mimic the Morgan Stanley REIT Index. This indicates that the REITs are extremely overvalued. Also, -5.3% earnings growth makes the matter even worse.