Why The Price You Pay Matters To Your Investments

It’s axiomatic that the price you pay for an investment is one of the major factors in its ultimate return. This makes the accompanying chart worth the attention of every investor, for it illustrates the relationship between the valuation level of the S&P 500 and the subsequent 10-year expected return.

Not surprisingly, the higher the valuation of the market the lower the expected future return. According to Bank of America research, the current valuation level of the S&P 500 suggests a 10-year expected return of a dismal 1–2%. If one backs out the influence of the heavily weighted, ultra-high valuation, Magnificent 7 group and consider the S&P 500 on an equal weighted basis, the return improves to 4–5%.

We think these results are highly likely. We also think they are unacceptably low to compensate investors for the corrosive effects of inflation and market volatility.

Buy-and-hold passive investment will not be sufficient in the coming decade. While the overall absolute returns from markets will be uninspiring, the highly volatile markets we anticipate in the years ahead will provide attractive investment opportunities for attentive investors.

Though the market environment may be challenging, investors who practice effective risk management techniques and who are prepared to seize opportunities for profit across markets and asset classes will see superior results. The chart should serve as a reminder to us all that complacency is not a luxury we should indulge in.

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