With valuations approaching all-time highs (and by some measures at or near the highest points in history, including right before the Great Depression), investors have a right to be worried, or at least concerned, about the direction the stock market is headed in the near to medium-term.
Piling all of those savings into the stock market at a time like today may seem ludicrous, given the lessons we have learned (or failed to learn) from history.
The idea is that over the long-term, valuation multiples regress toward a long-term mean. While some valuation multiple expansion may remain over long periods of time, the general consensus is that today’s stock market levels may have been the result of continued monetary stimulus in the global market, combined with capital flight from parts of the world with strict capital controls to free market economies such as those in North America.
The upward trends we have seen over the past 10 years have resulted in many investors who bought in at the end of the last recession doing very well for themselves; for others who failed to remain in the market or get in when the going was cheap, prices have certainly gone up for most blue-chip stocks, to the point where some investors may be asking “why bother?”In today’s market, some excellent defensive names and counter-cyclical names exist to reduce much of the market-related risk all investors are exposed to. Over a long period of time, it is generally advisable to have a well-diversified portfolio of bonds, equities, and alternative investments, in a bid to spread out as much of said risk as possible over multiple asset classes.
Invest Wisely, my friends.