Robert Shiller, Yale professor and Nobel prize winner, is “definitely concerned” about the valuation of stocks which are trading at historic highs. Using his CAPE (cyclically adjusted price-to-earnings ratio) model, stocks are trading at 26x multiple which is well above its long-term average of 17. Shiller points out that the CAPE level has only been higher 3 previous times: 1929, 2000 and 2007. That sure sounds like a dire warning of a huge market drop. But is it?

“It looks to me like a peak,” says Shiller. “I would think there are people thinking ‘it's gone way up since 2009, it's likely to turn down again.' That's what people might plausibly think.”

Despite the CAPE trading at high levels, Shiller isn't actually advocating selling all your stocks because it could act like 2000 again. Shiller says, “Realistically, stocks should be in one's portfolio but maybe lighten up.” He believes that stocks should be in one's portfolio because interest rates are so low that the fixed income market isn't very attractive.

 Are you taking defensive measures? What do you think about Shiller's CAPE model?