A Perfect Storm For Low Returns
Today’s investors may have drawn the proverbial “short straw.” From an investment perspective, they are confronting what might be considered a “perfect storm” creating strong head winds against higher expected returns. We’ll begin by discussing the three main factors conspiring against them, then analyze some of the options investors might employ to combat this problem.
Equity Valuations Are High
As I write this, the CAPE 10 on the S&P 500 is roughly 26.3. In a November 2012 paper, “An Old Friend: The Stock Market’s Shiller PE,” Cliff Asness of AQR Capital found that when the P/E 10 was above 25.1, the real return over the following 10 years averaged just 0.5%, virtually the same as the long-term real return on the risk-free benchmark, one-month Treasury bills.
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