October 21, 2016
It’s no secret that the stock market during the last couple of years has been an uninspiring and tough environment for value-sensitive investors.
But keep in mind, occasional lackluster periods are entirely expected during the course of a long-term, valuation-driven investment strategy. And if you’re conscious of the price you’re paying, particularly in today’s environment, you can look forward to attractive risk-adjusted returns over a full market cycle.
A few areas — particularly value stocks, emerging markets and energy-related investments — have dragged down the performance of many portfolios over the last few years. And as this bull market nears its eighth year, many investors have been concentrating on recent price performance, narrowing their focus to a small number of increasingly expensive technology stocks, and foregoing the fundamentals of good investment decisions, like cash flow and earnings. The Wall Street Journal has run a spate of articles recently about the precarious position of equities, U.S. companies in particular.
This environment of elevated valuations will not — indeed, cannot — persist indefinitely. Considering the last two great market run-ups in technology stocks and real estate, we can expect to eventually see the valuations of the most expensive assets deflate over the next few years.
Of course, it’s impossible to know when that correction period will begin. As my colleague Dave Grecsek, Aspiriant managing director in Investment Strategy & Research, noted, “It’s entirely possible current prices remain largely the same, and rather than a major correction, we receive a steady diet of lower returns moving forward.”
Fortunately, some of the low-performance trends have started to reverse over the last six months — value stocks, emerging markets and energy-related investments have all posted strong results. However, it remains to be seen whether this encouraging reversal is part of a return to more reasonable valuations.
This means the price you’re paying for investments today is crucial to how they perform over the long-term. If you continue to look for value, we expect attractive risk-adjusted returns over a full-market cycle (seven to 10 years). In short, price will always matter.
At Aspiriant, we’re asking clients to remain patient and keep in mind two important truths of investing:
While it may feel more comfortable to chase performance, taking a rigorous, systematic approach to your investment portfolio will steer you toward fundamental value and away from speculative excess.
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