Are Stocks Ugly?
The Wall Street Journal recently published a story comparing the appeal of stocks relative to bonds. The headline should tell you the verdict:
Stocks Haven’t Looked This Unattractive Since 2007
Before thinking about the article, here is a little background.
In the investment world, higher risk is supposed to be accompanied by higher expected returns. Investors demand more when perceived risks are higher. Makes sense.
For the sake of argument, assume I can earn a riskless return by lending money to the U.S. government in the form of Treasury bills, notes, or bonds. And I can earn extra returns, above that risk-free return, by taking incrementally greater risks. That ‘extra’ return is referred to as a risk premium. And in the case of the extra return from owning stocks, it is called the equity risk premium.
According to the article linked above, the additional reward for owning stocks instead of less risky bonds, a.k.a. the Equity Risk Premium, is as small as it has been in over 15 years, since 2007.
2007. That was right before one of the worst bear markets in the last century. For those with short memories, the S&P 500 fell about 50% from October 2007 through March 2009 lows. The chart below shows the cumulative performance of stocks and bonds, quarter by quarter, from that October 2007 starting point.
Stock investors had to wait six years before they caught up with bond owners.
We often say starting points matter. And that seems particularly true in the short term.
Zooming out, though, they seem less important than just being invested. October 2007 was literally the worst time to buy a diversified basket of stocks in the last 20 years. Assume you had terrible timing and invested a lump sum at that point, how have you fared? In hindsight, not bad at all.
The S&P 500 has returned 268%, or about 8.8% per year, from that starting point.
Perhaps this is just another reminder that stocks are often most risky in the short run, and typically less risky in the long run. Today is probably no exception.
Will corporate profits shrink in the back half of 2023? What about fears over commercial real estate debt, or inflation that just won’t seem to let up?
In the short term, the answer to these questions probably matters a great deal. And in the long run, they are probably less important.
It’s why we think long-term goals deserve long-term portfolios, and short-term goals deserve portfolios with more near-term certainty.
Please reach out to me or your Divvi advisor if you’d like to discuss more.
You can email me at eric@divviwealth.com or set up time with the Divvi team to continue the conversations.
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