I’ve posted Entry #133 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stock Market Prices Don’t Reflect Economic Realities.
Juicy Excerpt: Why doesn’t everyone look at it this way? We get caught up in the short-term craziness. We look at prices instead of values (which can be properly identified by making an adjustment to the nominal price to reflect the P/E10 value that applies at the moment). We take the risk out of stock investing when we force ourselves to ignore price movements, which are chaotic because they are driven by emotion, and focus in instead on value movements, which have been highly stable for 140 years now.
Put $10,000 in an index fund and in 12 months time you will have an asset worth about $10,650. In 24 months, you will have an asset worth about $11,300. In 36 months, you will have an asset worth about $11,950. Like that.
Stocks provide safe and steady returns. They always have. They always will.
The only reason we don’t see it that way is that we get caught up in the short-term craziness. We shouldn’t. We don’t invest for the short-term. We invest for the long-term. So when we want to know the value of our portfolios, we should check out the long-term lasting values. not the short-term temporary values.
Adjusted prices are the real prices.