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Borrowing Returns

STOCK PRICES should climb with the growth in corporate earnings per share. What if we do better than that, thanks to rising price-earnings multiples? We may discover that we’re 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, plus 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 to early 2012.

Similarly, bond investors notched handsome returns as the 10-year Treasury yield plunged to record lows in 2020. But from there, returns may be relatively weak, and any new dollars invested will buy bonds at extremely modest yields.

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