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Market Risks

Adam M. Grossman · Oct 10, 2026 · 0 replies

YOU MAY BE familiar with a concept known as Pascal’s wager. Named for Blaise Pascal, a devout seventeenth-century French mathematician, it was a thought experiment in which he tried to weigh, in logical terms, the costs and benefits of believing in God. His conclusion: The cost of not believing—a potential eternity of damnation—was so extreme that it far outweighed any other consideration.

I mention Pascal’s wager because a common question is whether similar logic might apply to financial decision-making. While not perfectly analogous, I do think the central premise of Pascal’s wager is useful—that we should be attuned to situations where the relative outcomes may be lopsided. Consider the stock market, where two types of risk are, in my opinion, often underappreciated.

The first of these risks is, counterintuitively, that market history can be unhelpful and misleading. Look back at the U.S. stock market over the past 100 years, and you’ll find that its average annual return has been right around 10%, thus doubling about every seven years. Through that lens, the stock market has been a powerful and reliable way to build wealth.

The problem, though, is that this 10% figure is a long-term average return. Look at the market’s actual returns from year to year, and they’re anything but average. Some years are better than average, but some are much worse. As I noted last week, there have been a handful of years in which a worker entering retirement would have faced severe headwinds. These include 1929, of course, as well as 1969 and 2000. Most other years wouldn’t have posed as much of a challenge. But since there’s no way to know which sequence of returns any of us will encounter in our own retirements, we can’t rely on the market’s long-term average. In fact, we almost need to ignore that number and instead insulate our portfolios against those worst case scenarios. Long-term averages, unfortunately, don’t apply to any one individual.

That’s the risk in looking at market history. The market’s current conditions can be equally misleading. That’s because, when the market is strong, as it is today, investors tend to draw one of two equally problematic conclusions.

Some look at recent performance and conclude that it’s likely to continue. This is known as recency bias, but it’s a way of thinking that’s entirely understandable. After all, it’s totally rational to expect and assume that tomorrow won’t look dramatically different from today, because most of the time that’s the way things turn out. But from time to time, things do really change. Because those changes are the exception rather than the norm, though, and because they often arrive without warning, recency bias continues to be a powerful force that can lull investors into a false sense of security.

Other investors look at a highflying market and draw an entirely different conclusion. They focus on metrics like the market’s price-to-earnings ratio (P/E)—which is undeniably elevated—and conclude that the market is skating on thin ice and thus likely to drop. 

That seems rational. The problem with this conclusion, though, is that valuation tools like the P/E ratio aren’t perfectly predictive; they only look predictive. This has been known for a long time, but this week, a new paper by researcher Cullen Roche provided additional perspective to support this point. The paper is titled, “Valuations Matter. Just Not the Way Wall Street Says.” The central premise: The market’s P/E ratio has almost zero predictive power in the near term. Statistically, it tells us virtually nothing about returns over the coming 12-month period. When are valuation metrics helpful? In Roche’s research, he finds that metrics like the P/E are only roughly indicative of future returns and only over a 10-year period. 

The bottom line: Whether one is an optimist or a pessimist, the data tell us that we should be careful to avoid bets that go too far out on a limb in any one direction.

That presents a problem, though: If we shouldn’t look at market history and shouldn’t put too much stock in where the market is today, then how should we think about our finances? Here are three suggestions: 

1. Set an asset allocation target for your portfolio and then manage to that target. In general, the result will be that you’ll sell stocks when they’re high and buy when they’re low, which is exactly the right result. And by taking this approach, you’ll avoid the generally unhelpful advice of market commentators claiming to be able to read the economic tea leaves.
2. Put most of your focus on your own financial plan. I suggest tracking what I call the big four: your income and expenses, assets and liabilities. If you can get these numbers on one sheet of paper and track them over time, I see that as maybe the most productive financial exercise.
3. Avoid “exciting” investments. It would be easy to look at a company like Nvidia, which has seen its stock gain 14,000% over the past 10 years, and feel motivated to search for the next market leader. Intuitively, we know this is harder than it looks, and the data confirm that stock-picking is extraordinarily difficult. But according to some studies, it’s even harder than that. Research by Hendrik Bessembinder has found that the median lifetime return of all of the stocks that have traded on U.S. exchanges historically is actually negative. Just 4% of all stocks have accounted for all of the market’s returns in excess of Treasury bills.

As Pascal might have suggested, look for ways to tilt the odds in your favor even when the future is, ultimately, unknowable.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.