Loading...

Forum

Please or Register to create posts and topics.

Read "stocks only go up" every day

Hi all,

Cullen's recent article on stock market volatility is pretty fundamental. Read it every day to avoid getting obsessed with the daily narrative and make investment decisions you will likely regret in the long run (such as timing the market).

Disregarding lots of stuff, like funding ratios and such, what matters is the virtuous feedback loop between risk capacity and investment horizon. The article nicely highlights the psychological tension that can bar you from profiting from this virtuous cycle.

That is, of course, if you believe that stocks will carry a premium over alternatives in the long run. I think that still holds, in particular vs most types of (fixed-income) alternatives readily accessible to DIY investors.

If the near-term volatility puts you off, there are plenty of other options. Make a short term deposit with your bank, for instance. But what a gap between expected returns on that and equities...

Any thoughts?

My view is that there has to be a lower bound on the equity risk premium because the cost of funding at the equity level should make it so much more valuable to fund corporate spending by issuing new shares that the rate of inflation AND the new share issuance should reduce future returns to existing shareholders.

The S&P 500 just posted its best 12 month return in the post-war era. Anyone who thinks the stock market is on a sustainable path here is fooling themselves.

Cullen Roche and Richard Sanders have reacted to this post.
Cullen RocheRichard Sanders

I couldn't agree more that recent bumper returns are more of a one-off than a sustainable trend. Current valuations and future returns are inversely related. Speaking from the perspective of a Euroland investor (with poor return prospects in financial markets compared to the US), I would put the long-term (let's say, 20 years) expected return on stocks at 3% - 5%. This is still attractive compared to safe Treasuries (about 0%) or high octane fixed-income investments such as HY bonds (I expect about 2% return on that). However, to generate that additional few percent you have to be able to sit out a bumpy ride

Cullen Roche and mpstrunk have reacted to this post.
Cullen Rochempstrunk