Are Stock Investments Risky Today?

Written by: Michael Carbone, CFP®

Stock investments subject investors to market price volatility.  Stocks have historically risen in value as the economy has grown over the years.  Investors accept market volatility in the hope of benefitting from rising stock prices. 

For most investors, volatility is addressed with our stock to bond allocation.  Everyone is different.  Your asset allocation should be constructed within the context of your overall financial situation.

Addressing this question requires admission of an empirically observed truth: consistently forecasting stock returns with accuracy is notoriously difficult to do over short time horizons (i.e., inside 5 years). So, a lot of money managers will think in terms of expected returns over a ~5-10+ year horizon. Due to current market valuations, I believe it would be reasonable to argue that stock investments are riskier now than in average times. But what does that mean? Generally, it means two things:

  1. Future stock returns are expected to be below the historical average, and
  2. Stocks may fall more than average in the next recession (although they may not).

Expected returns are developed in the process of forming capital market assumptions. This analysis is often based on current market valuations, expected economic growth, interest rates, and other factors. Although no one knows, many analysts expect below average stock returns over the next 5-10 years.

You may be wondering why invest in stocks if returns may be lower than they’ve been in the past? Although past performance cannot guarantee future results, after periods of below average returns, ensuing stock returns have historically reverted towards the long-term average. And interest rates are at historically low levels, making potential bond returns less attractive. So, instead of trying to time the markets, diversification and asset allocation may put the probabilities in our favor.   

If you don’t feel comfortable, or simply aren’t interested in managing your own investments, please reach out to me for a discussion. I’m happy to answer any questions you may have and/or show you how we’re helping investors. I can be reached by email or phone at; 978.455.7799.

Thank you for reading!

Michael Carbone, CFP® 

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Advisors, Inc. Eppolito Financial Strategies, LLC is not a registered broker/dealer and is independent of Raymond James Financial Services.

Any opinions are those of Michael Carbone and not necessarily those of Raymond James.  Expressions of opinion are as of this date and are subject to change.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investments mentioned may not be suitable for all investors.  The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

Past performance is not indicative of future results and there is no assurance that any investment strategy will be successful.