Getting into the market when stocks
are highly valued can work against an
investor. Even over time horizons as
long as 20 years or more, investing in
high-valuation environments can lead
to below-average returns. Conversely,
if stock valuations are low when the
investor begins, he or she may be able
to ride a secular bull market1 to above-average
Even young investors with long time
horizons must be careful not to assume
too much risk in an overvalued market,
even if the long-term return eventually
averages out to what was initially
anticipated. And unfortunately, retirees
taking withdrawals can suffer even more
from an unfavorable sequence of returns.
Where are we now?
The concept is relatively straightforward: Higher valuations tend to lead to extended
periods of sub-standard performance. For example, if you bought an index fund
tracking the Standard & Poor’s 500 (S&P 500) when valuations were at an all-time
high in mid-2007, how long would it have taken you to recoup the 38.49 percent
decline in the S&P 500 in 2008?
Let’s look at it another way:
Suppose you invested in the S&P 500
on January 1, 2008—you would have
enjoyed a 70.72 percent cumulative
return through December 31, 2018.
And you would not have “brokeneven”
until March 2012.
Had you waited just over a year and
presciently bought at a lower valuation
on January 1, 2009, you would have
enjoyed a cumulative return on your
investment of 177.54 percent.2
The lesson here is to avoid risk in
high-valuation environments, and
consider increasing your risk when
valuations are low—in other words,
the optimal investment strategy
shifts depending on where you are
in the secular market cycle.
In case you're wondering: The forward 12-month P/E
ratio for the S&P 500 is
14.4 at the start of 2019.
This P/E ratio is below
the 5-year average (16.4)
and below the 10-year
Retirees need to pay attention too
The implications of market valuations extend beyond just when to invest.
Market valuations also have a significant impact on determining a safe
withdrawal rate when someone retires. Those who retire in favorable valuation
markets generally have safe, sustainable spending levels that start higher than
those who retire when stocks are overvalued.
Market valuation can also be relevant for tax decisions. Investors often try
to hold their shares for tax reasons—some hold an appreciated position long
enough for it to qualify for preferential long-term capital gains rates, then they
sell. Others are simply unwilling to sell a position and take a gain (and some risk)
off the table because of the tax impact.4
The bottom line is that a long-term average is a useful piece of information,
but it doesn’t tell the whole story. And once you begin to account for how
markets are valued, the implications quickly spread beyond just a discussion of
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The article above was provided to Synovus by eMoney Advisor, LLC, and is used here with permission from eMoney or a third party content provider. eMoney does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This information was provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Market-watchers refer to a broad, long-term trend as secular. A secular bull market is a several-year period when the prevailing tendency is for rising valuations. A bear market, of course, is one where stocks fall.
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