Don't Reach

July 3, 2017

 

As we get later in the economic cycle, returns are going to be more difficult to come by. The US stock market is fully valued if not borderline overvalued especially in the growth parts of the market. The temptation as return expectations start to lower is to reach for return. That would be a mistake.

 

It is an understandable reaction, if our forward guidance suggests that returns might be lower, that we should move into something that has a higher return expectation. The issue with that logic is that it is too focused on returns without fully conceptualizing that on average to achieve greater returns, more risk is required as well.

 

The good news is that for nearly the last decade, returns have been phenomenal. If you were invested correctly, returns of even conservative portfolios have neared double digits annually since 2009. Since returns have been above average for so long, it is okay to have below average returns for a few years and still meet your long-term goals. Even if you missed some of these returns, hold on, now is not the time to stretch your portfolio. There will come a time again when the market is cheap, for now, find a place that you can sustain for now and be opportunistic when market panic sets in again.

 

We remain vigilant in the late cycle, it is not unprecedented for the market to still offer large returns. However, probability suggests that these will be expensive and will come with increased risk such as the tech bubble in the late 90s. If you want higher returns in the long run, this type of market suggests patience and preparation for future opportunity.

From Goldman Sachs, June 2017:

 

“In periods of elevated valuation, our base case is that investors will need to work harder to achieve increasingly modest returns. Investors may be tempted under such circumstances to take on greater risk for each unit of return as a response. We think that would be a mistake.”

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DISCLOSURE Information on this website and others should be used at your own risk. Past performance does not guarantee future results. Securities investments involve risk; returns in such investments vary and may involve gain or loss. The materials and content herein are not a substitute for obtaining professional tax, personal financial planning, or other relevant financial advice from a qualified person or firm. For full disclosure click on the disclosure link at the bottom.

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