Every few years, a valuation metric starts making the rounds and people panic. This week it is the Shiller CAPE ratio, also called the cyclically adjusted price-to-earnings ratio, which compares the S&P 500's current price against its average inflation-adjusted earnings over the past ten years. The Motley Fool reported that it has reached a level we have only seen a handful of times in market history.

That sounds scary. I understand why it gets attention.

But let me tell you what the CAPE ratio actually does well, and what it does poorly. It does a reasonable job of showing you that stocks, as a group, are expensive relative to their long-term earnings power. Right now, they are. There is no debate about that. What it does poorly is tell you when that matters.

The CAPE ratio has been above its historical average for an extended period now. To my recollection, the same warning was sounding in 2016, 2018, and 2021. Some of those years were followed by corrections. Others were followed by more gains. The metric itself never changed its tune, which tells you something about its usefulness as a timing tool.

Here is what I have learned from living through the crashes in 2000, 2008, and 2020. Valuation tells you about risk. It does not tell you about timing. Stocks can stay expensive longer than your patience lasts, and they can get cheaper fast in ways nobody predicts.

What should you actually do with this information? The same things I always suggest. If you are dollar-cost averaging into broad index funds every month, keep doing it. If your portfolio is heavily concentrated in a few high-flying tech names because they have gone up the most, this is a good reminder that valuations eventually mean something. Maybe take a look at your allocation. Rebalance if things have drifted.

I have watched the CAPE ratio go through several cycles of alarm and indifference. The people who did fine were not the ones who predicted the top. They were the ones who owned a diversified portfolio, kept their costs low, and did not flinch when the headlines turned dark.

When everyone around you is either euphoric or terrified, the boring middle is usually where you want to be.

As always, I am sharing my perspective, not professional financial advice. Talk to a qualified advisor before making changes to your portfolio.