Is The Market Overvalued? So What!
Bottom Line
Historical market data supports the notion that stocks will grow purchasing power and beat cash over the long term, no matter when you decide to invest.
Market Risks Are Always Present
One of the toughest decisions I have to make as investment advisor for my clients is determining how to invest a large cash inflow. There are always endless reasons to justify sitting out of the market at any given time. Aren’t stocks expensive? Will there be a recession next year? What about rising geopolitical tensions, the upcoming election, high oil prices or rising inflation? We tend to overemphasize near-term risks (vs. long-term risks) as investors, and it’s not all that surprising. There is more information available to us than ever before and the media industry exists to create attention grabbing content.
What if I told you that what’s happening in the world today probably doesn’t matter? There’s an endless list of economic issues we’ve dealt with over the past 100 years. The Great Depression, two World Wars, an extended bout of stagflation in the ‘70’s, followed by the Asian currency crisis. Just in the past 20 years, we’ve experienced the Tech Bubble, Global Financial Crisis, September 11th and Iraq Conflicts, a global pandemic, 9% inflation, multiple recessions and bear markets. There will always be risks out there to take into consideration.
The real risk to be mindful of is thinking we know what will happen next year, the year after, or even 30 years from now. Putting myself in my clients’ shoes, I can understand the feeling of handing over a lifetime of hard earned wealth to the seemingly volatile financial markets. It’s not easy and I try to do my best to guide them towards decisions that are both optimal for the client, and ones that can provide them with a comfort level to stick with over the long-term. The latter is probably most important and can often involve some level of compromise with the former.
Avoid Temptation To Time The Market
The most difficult step is acknowledging we don’t know what will happen in markets over the next year and accepting it. Only then can you move on to the bigger picture and attempt to make the best decision for your situation. This chart shows calendar year returns for large cap U.S. stocks going back nearly 100 years.
Your guess is as good as mine as to whether the stock market will be up or down next year. And that’s OK!
Long-Term Stock Return Trends Are Good!
We all love to say we are “long-term investors”, but what does that mean? It means removing ourselves from the daily market noise and frequently reminding ourselves of long-term trends. When was the last time you looked at 10- or 30-year market returns? If you did, you would find that there have only been a handful of 10-year periods in which you would have been better off in cash, as measured by the 3-month U.S. Treasury Bill, vs. stocks measured by the S&P 500 Total Return. These periods of stock underperformance include the Great Depression, ‘70’s stagflation and Global Financial Crisis. During these periods, the difference between cash and stock returns was less than 5% and even if you had invested at or near the market peak, stocks retraced their losses to pull in front of cash within an average of less than 6 years. Meanwhile, stocks often outgained cash by 5%+ during all other periods. And there were also entire decades where you would have lost purchasing power due to high inflation by sticking with cash.
A decade is a long time, but what happens over even longer time periods? After all, we will likely own stocks for many decades, even well into retirement. History shows that stocks reliably return between 9% and 14% annually over rolling 30-year time periods going back to 1927, beating out cash and inflation by anywhere from 4% to 10% annually. There hasn’t been a single 30-year period in nearly 100 years where cash has been a better investment than stocks or where stocks didn’t grow purchasing power.
Recognize That Staying Out Of The Stock Market Is A Risk
As we think about how tenuous investing a pile of cash into the stock market seems today, take comfort in knowing that you (and your advisor) don’t know what’s going to happen next year and as long as your investment horizon is longer than 6 years, the odds are in your favor that you’ll end up growing your wealth. The key is to build a rules-based approach to adding capital to stocks over time so that you can ride out the year-to-year volatility and fully experience the wonder of compounding!
Source: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
The information contained herein has been obtained from sources that are believed to be reliable. However, Savvy does not independently verify the accuracy of this information and makes no representations as to its accuracy or completeness. All indices are unmanaged. You cannot invest directly in an index.
This information is intended to be educational and is not tailored to the investment needs of any specific investor. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Savvy Advisors. Past performance is not a guarantee of future results.
