I’ve posted Entry #59 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Indexing Changed Everything.
Juicy Excerpt: I believe that we are today’s in the last days of stock price volatility. I believe that we are in the early days of a transition to the most exciting time ever to be a stock investor, an era in which stocks will continue to produce high returns but in which price volatility will be reduced to a tiny fraction of what we see today.
The development that brought on the change was the introduction of index funds. The prices of individual stocks will always be volatile. That’s because we are always discovering new things about individual companies. New products are introduced, old ones fail. New marketing campaigns are developed, old ones are shelved. New managers are hired, old ones are let go. All of these changes affect the profits generated by the company and thus the share price of the company’s stock. Individual stock price volatility is here to stay.
None of these things affect the share price of broad indexes. The value of a share of a stock index is determined by the productivity of the economy in which the companies operate. The U.S. economy has been sufficiently productive to support an average long-term return for stocks of 6.5 percent real for as far back as we have records. It is unlikely that the long-term average return for U.S. stocks is going to vary too much from that anytime within the lifetime of anyone reading these words.