Are Stocks Cheap?
As of Friday, October 17th 2008 the S&P 500 has dropped roughly 35% since the beginning of a year, one of the largest one-year drops on record. But does that mean stocks are cheap? Not in and of itself, but stocks are finally beginning to look under-valued relative to certain historic metrics.
Currently, the market is trading at just 11 times last year’s earnings, which is almost 25% lower than the market’s historic average of 14.45. If we assume the market’s future return corresponds more or less with its current earnings yield, that implies an average of roughly 9.1% over the long term, which isn’t too far below what we’ve had in the past and far better than many recent estimates.
Perhaps the “are stocks cheap” is the wrong question to ask. Instead, ask yourself “am I willing to accept the risk inherent in this volatile market for a 9.1% return?” If you answered yes, buy now. If not, don’t. Of course, this is a gross oversimplification but at its root, the question isn’t so much “is now a good time to buy” as much as “are future returns likely to be worth the risk, in my own estimation?” After all, the market practically always goes up over the long term. It’s a fairly safe bet you will have made money 20 years from now no matter when you bought. But is it likely to be enough for you?
Good perspective and you are asking the right question. I do think there is some value to be had as the next 6 months of bad news is probably priced in. However, I think it is far to risky to play a single stock and a better (and safer) bet is to invest via an ETF or low cost mutual fund.
Agree. Definately think there is a ton of value out there to buy. Every other week when I get a paycheck I am purchasing mutual funds for my 401k at very cheap prices, these funds will rebound. Everything went down over the last few months so it will come back and our accounts will spike.
It is definitely a period to accumulate stocks. Over a long enough period, stocks will outperform virtually any other investment.
Both Andy and DocS are CORRECT to emphasize diversification via funds. I am concentrating on oil companies, but I am prone to take on more risk than many investors and I really think the average person will do pretty well if they HOLD their NEW purchases for 3 to 5 years or more.