STOCK PRICES should rise with per-share earnings growth. What if we do better than that in the year ahead, thanks to rising P/E multiples? Given that the stock market has rebounded nicely from the 2007–09 bear market, we wouldn’t be playing catch-up after a period of depressed valuations. Instead, we would likely be borrowing from the future.
As our portfolios grow fatter, that might not seem so bad. But remember, richer valuations mean future returns will likely be lower, and any new dollars invested will buy shares at those higher valuations. In fact, as discussed elsewhere, those still saving for retirement should probably pray for lousy returns.
This same phenomenon occurs with other investments. Remember the housing boom during the initial years of this century? Annual price increases raced far ahead of inflation. But those gains effectively borrowed from the future, resulting in wretched returns from mid-2006 onward.
Similarly, bond investors notched handsome returns as the 10-year Treasury yield plunged to record lows in 2012. But from there, returns have been relatively weak, and any new dollars invested have bought bonds at extremely modest yields.
Next: Market Timing
Previous: Whither Stocks?
Article: Repeat After Me