Be Mindful of Stretching for Returns

July 31, 2015

 

In the six-plus years since the end of the bear market in 2009, large cap US stocks have tripled in value.  Those stocks now trade at about 23 times their operating earnings for the last 10 years, higher than the historical average of about 16 times.  According to the Wall Street Journal, when stocks have been "this expensive in the past", the following 10 year returns have hovered only around 5%, plus inflation, annually.

 

So, what's an investor to do?  Hunting for bargains is an obvious choice, but beware.  Some speculators are chasing high returns in some shaky places.  The three best performing foreign markets earlier this year were Venezuela (in severe economic trouble), Argentina (defaulted on their foreign debt last year) and Russia (where do we start?). 

 

For most investors, a great choice is to save more.  If returns might not be as robust as you expected, saving more will help meet your portfolio goals.  Be sure to maximize those pre-tax 401(k) contributions and get the biggest match from your employer.  Pre-tax investing is like getting a huge return bonus immediately from Uncle Sam.  If you save $10,000 and are in a 25% marginal tax bracket, it's like getting an immediate 33% return on your money.

 

Another great idea is to rebalance your portfolio between stocks and bonds and within stock classes as well (sell some US stocks and buy international, perhaps).  You can juice up your future returns by buying assets that are currently on sale and selling those that might be pricey.

 

Costs matter-if returns are less robust, costs will eat up a bigger percentage of your returns.  So use low-cost mutual funds, and avoid excessive trading!

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