Starting from the March 2000 peak, the S&P 500 real total return without any taxes was still negative over 13 years later. That's maybe half the usual investing career, not just a transient blip to live through with a cheery attitude. It was well under 2%/year at the 20 year mark.

Yep, I lived through that period and remember it well. Many baby boomers like me are on this board, and remember it well also.

So how do you explain that so many of us stayed invested through that bubble period and still retired early years ago? The problem with your illustration is that it assumes that the investor put in a big lump sum in the market in early 2000 and never invested again. That's not a realistic assumption, and it's not the way index funds get purchased in a 401K plan.

Back in 2000, those of us in the baby boom generation were still 10 to 20 years away from retirement. It would have been a huge mistake to have stopped dollar cost averaging into a tax deferred S&P 500 fund when your retirement was that many years in the future. The monthly index fund purchases you made in 2001 and 2002 when things were the most bleak made spectacular returns and helped you retire early.

It seems rational and smart to say that you could have "timed the market" and you shouldn't have bought when the trailing P/E of the market was high. Unfortunately, there is no statistically significant correlation between the market's overall P/E ratio and forward returns. This seems counter-intuitive, but it's true. And you don't need to take my word for it. Listen to what Citigroup's equities director said:

"When we look at the relationship between the market's multiple and forward returns, it's nonexistent," Citi US equity strategy director Drew Pettit told Yahoo Finance. "The correlation between returns and PE is almost zero over the past 20 years."

BMO chief investment strategist Brian Belski agrees.

He prefers not to make valuation calls because they're a "trap."

"Valuation is actually the worst metric for future performance," Belski said. "Too many people are looking at the market and they want to make these broader market calls. And they're not kind of looking at the underlying components of the market. You know, after all, the stock market is a market of stocks; you don't buy the entire market."

Reference: ca.finance.yahoo.com - With the sp at a record high strategists warn against a valuation trap