The price/earnings ratio for the broad stock market, currently about 20 times the trailing 12-month reported earnings for S&P 500 companies, is a wonderfully simple measure of market valuation.

Put another way, each $100 invested buys us $5 of earnings, giving us an “earnings yield” of 5 per cent. Obviously, the more earnings we can buy with each $100 that we invest, the more easily we can shrug off market downturns, knowing that we have a solid earnings foundation to protect us.