I’ve posted a Guest Blog Entry at the Invest It Wisely site titled Stocks Are Far More Risky When Valuations Are High.
Juicy Excerpt: My interpretation of these numbers is that stocks are a less risky asset class than most believe. So long as you limit yourself to buying stocks only at moderate or better prices and commit to a 10-year holding period, you are virtually guaranteed to at least break even. That’s a very good deal, given the upside potential that applies when stocks are purchased at those prices (the annualized return that applies if the best-case returns sequence in the historical record happens to turn up for stocks purchased at fair value is 12.3 percent).
It’s a very different story when stocks are purchased at high prices. The P/E10 level in January 2000 was “44.” The worst-case 10-year return for stocks purchased at those prices is a negative 7.09 percent. That means losing an average of 7 percent of your money every year for 10 years running!
Even the most likely return here is a negative number. And even at 20 years there is a 20 percent chance that your annualized return would be a negative number. And even at 40 years there’s a chance that your annualized return would be under 3 percent. Now that’s risk!