High Stock Market
Studying Stock Market Returns
This chart has several important points. The first is that in the short term anything can happen to the stock market. Over one and three year time periods, the markets can deliver low returns and even big losses regardless of valuations. This shows why trying to time the market is not effective. It also shows what range of returns investors might expect. The second is that valuations do in fact affect returns on average. Based on the P/E ratio of 22, US stocks are in the range of valuations that has delivered a 7% return on average for investors since 1945. That’s markedly lower than the historical average of about 10% for all valuations.
How to Respond
- Diversify globally. U.S. stocks have rallied more than stocks abroad since 2009 and have some of the highest valuations. Bargains are available to investors in developed foreign markets (such as Western Europe and Japan) where valuations are close to historical norms. Emerging Markets (such as China and Brazil) offer valuations below historical norms and higher potential returns.
- Gauge your risk tolerance. After nine years without a bear market, investors may treat the chance of stock price declines as a hypothetical risk. It is not. Investors should take a look at the chart above. Particularly for the 1 and 3 year periods imagine how they would feel about their portfolios if the returns were on the low end of those bars and investors are facing losses. Now is the best time to make sure our eyes aren’t bigger than our risk appetite.
- Construct your financial plans with lower returns in mind. When we run financial plans for our clients, they reflect lower expected returns today than they did at the bottom of the market in 2009. This will help to avoid surprises if market returns fall below their long term averages.
Important Disclosure Information
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.