It’s Best to Start “Cheap”

Oct 2015

…in the past when stocks averaged much lower than 10% returns, subsequent 15-year average returns worked their way back to the 10% level—and then typically moved higher.  Similarly, when 15-year average returns were much higher than 10%, subsequent returns were lower.  This pattern makes sense:  When stocks have underper­formed their long-term average for 15 years, they may well be cheap.  And when you start with cheap prices, future returns should be higher.  Conversely, when stocks have significantly outdistanced the 10% annual threshold over 15 years, stocks as a whole may be expensive, which can lead to lower future returns.