Creating Realistic Expectations
History doesn’t always repeat, but it often rhymes. The data tells us stocks have generated a 10% average annual return for more than 92 years. The next nine decades may show similar results. But what about the next five to 10 years? Should we expect an average annual return of 10% per year?
The basics of stock market valuation
Think of a used car. Kelley’s Blue Book gives people an idea of the fair value of a particular make and model. This makes it easy for you to determine if the same car offered locally is over priced or listed for a bargain.
How Has Valuation Impacted Future Returns?
When valuations were below average, stocks generated above average returns in the future. Conversely, when valuations were above average, future returns lagged well below their averages.