Are the Days of Stock Investing Almost Over?

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By J Maslow

Stock CertificateI know that the title of this article might have caused you to raise your eyebrows. In many cases, you might have even rolled your eyes. You might be asking yourself, “Why would I stop investing in stocks when stocks, for the most part, are the best intergenerational investment choice available?”

This may be true if you extend your timeline maybe 40 to 50 years. However, if you extend your timeline long enough, you would realize that there are a lot of risks when it comes to stocks. There are also decades where stocks languished. I do agree with you that over a long time frame, investing in stocks is always a good move. However, in short or decade-long time frames, you might actually be doing more harm than good to your investment portfolio by increasing your exposure in stocks.

The reality is that, according to the Shiller price-per-earnings ratio, it looks like stocks will be too expensive in this coming decade. That is right. It may come to a point where it doesn’t make economical sense to invest in stocks. There is not much upside to it. You are only exposing yourself to serious risks of losses. Even if those losses don’t come to pass and you actually make money, the gains aren’t worth the risk. In other words, stocks might not provide a competitive enough return on investment and return on risk.

The Shiller price/earnings ratio is no joke. It was formulated to measure the intrinsic value of stocks. According to this measure, based on their ten-year average adjusted for inflation, stocks seem to be priced out. There is really not much upside potential.

On the whole, stocks are expensive. How expensive? Let’s put it this way. since 1870, the average Shiller price/earning ratio was around 16. Now, this metric is around 27. All told, you are buying stocks that are 70% more costly than their long-term average. If this isn’t bad enough, just by looking at these numbers, it appears that based on long-term trends, the value of stocks is going to be heading downwards.

Take these all with a grain of salt. After all, there are so many different financial indicators out there. Still, since this risk management tool uses data that goes back since 1870, it shouldn’t be lightly ignored.

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