Equities: Are we due for a correction?
06 March 2017 | Markets and Economy
With global share markets performing strongly, many investors wonder if it's time to change strategies. In this video – an excerpt from a webcast that aired in the United States recently – Vanguard CEO Bill McNabb and Chief Investment Officer Tim Buckley explain why trying to 'time the market' is a loser's game and why maintaining discipline over the long term is a better approach.
For an in-depth look at Vanguard's global economic and market outlook for 2017 and beyond – including our forecasts for the United Kingdom and Europe – read our report Stabilisation, not stagnation.
Rebecca Katz (moderator): I want to go back to this idea about the markets being ahead of themselves. Robert in Texas says, "We are probably close to the peak of the market. What argument exists to encourage continued new investment in the market at this time?"
So, do you think we're at the top of the market, and why would you keep investing if that were the case?
Tim Buckley (Vanguard chief investment officer): I wish you could find someone who could tell you when you're exactly at the peak of a market and what's going to happen next. But I've been in this business 25 years—Bill, over 30 years. We've yet to find that person.
So we can tell you that when markets are relatively cheaper or relatively more expensive—they're more on the expensive side now—but that does not mean you're at a peak. It doesn't mean that there will necessarily be a pullback. We could have a pullback. Even if, let's say, we have a pullback in the first half of the year, Rebecca, you shouldn't react to it. You should stick with your plan. And regardless of if the markets are going up or down, stick with your plan. If you try to react to them, you will lose.
Now you want a little encouragement to move on and to keep going into equities. Equities are—they're there for your long-term growth. And if you look at the P/E [price-to-earnings ratios] in the market right now, its valuation [is at] about 21 on trailing earnings on the S&P [Standard & Poor's 500 Index]. It's really right where it was let's say in 1992, my second year in this business; and the P/Es were about this level. And there were people saying, "Well get out of equities; they're too expensive."
Well, over the next decade, they went up, they went way up, right? We had a—you remember the dot-com boom and then the bust? But if you went the 10 years from '92, and you did the average annual return, you're getting about 8% from equities. Now that's not bad. We would take that today. We're looking out, [we] would be a little bit more cautionary—Bill, you'd say 6% to 7% is what we'd expect from the market?
Rebecca Katz: Last year they were up 12%?
Bill McNabb (Vanguard chief executive officer): Yeah, the markets these past 12 months have been stronger, I think, than anybody anticipated. Again, to put it in a little bit of perspective, Tim said it right, you can't time this stuff. And so we think all the talk about what's going to happen in the next quarter, what's going to even happen in the next 12 months, to a large degree. It's all interesting, and it's fun to do, and we all do it, but it's actually not that valuable in terms of being an investor. You really have to think in terms of longer time frames.
And as Tim said, over the next decade we expect returns might be a couple percentage points lower than the long-term averages. And based on where we are today, that's, we think, a pretty good bet. But that doesn't mean you shouldn't be in equities.
The second thing I would point out is even when you are looking at markets sort of trending up over 10 or 20 years, roughly a third of the time you spend in bear markets. So part of being an equity investor is learning to deal with that kind of volatility. And you will have fairly long periods of time where you're actually not doing well. And again, historically, it's been about one-third of the time.
Actually, what's so interesting about where we are right now is from 2009 to today, it's one of the longest bull markets in history. And we really haven't had much interruption, just a couple little blips if you think about it. So we're actually kind of due for a prolonged negative period at some point, and that's just going to be part of the process, if you will, to generate long-term returns.
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