Boy looking under bed with flashlight

How to take the fright out of investing

Financial Commentary
November 1, 2021

Michael ListBy Michael List, CFP®
Portfolio Manager

 

Investing can be scary.  Whether you are investing in your first house, new equipment for your business, or stocks and bonds; you are investing in the future.  In the future there are many unknowns, and that which is unknown can be very scary.  My children vividly illustrate this point.  

What’s hiding in the dark?

Try explaining to a three-year-old that there is nothing to be afraid of in the dark, or that noise they heard was just the heater.  As best we try, when the lights go out, it's nearly impossible to keep children from seeing every scary image in the meta-verse (or whatever they're calling it these days). Even with a night light, darkness lingers — in the closet, under the bed.  In the darkness are the unknowns.  Adults are not immune either.

Recall the scariest movies you’ve ever seen, the best directors let our imaginations amplify the horror.  You don’t get to see the monster until well into the movie, so your imagination has time to build up horrifying images.  Have you ever been disappointed when you actually see the villain?  Unknowns are always more frightening than knowns.  However, it is fascinating; there are many times when the benefits of reality exceed anything we imagined.  This asymmetry is applicable to the investment world, as well.        

Your investment should compensate you for the risk you take for future unknowns relative to the alternatives that are available.  Although imperfect, there are methods to help shine light on the future — a candle in a dark room, so to speak. One of most consistent predictors of future returns is the current valuation, commonly referred to as the P/E ratio.  Another predictor is past performance. While past performance does not guarantee future results, it’s a pretty reliable indicator.  For example, I can predict — with a high degree of confidence and based on past performance — that if someone brings chocolate chip cookies into the office, I am going to eat several.

When we look at the markets, there are knowns and unknowns.  As of the end of October, U.S. stocks were trading near all-time highs.  We also know that earnings are at all-time highs too, not just in the U.S. but also all over the world (as shown in the chart below from Fidelity).  Earnings growth everywhere is running at the fastest pace in the past decade, everywhere.  However, that won’t last forever. Earnings growth could decelerate, perhaps as it did after 2017.  Still, current estimates for future earnings growth are coming in around 15%, which is above the long-term average.  

Chart: Global EPS Growth

One benefit from faster earnings growth has been a decline in valuations.  Growth of earnings has exceeded share price gains in 2021; which has brought down valuations globally.  That said, as we noted in the quarterly commentary, valuations are still elevated by most measures relative to history.  We also know that valuations are cheaper for international stocks compared to those in the U.S.  Valuations have improved since the beginning of the year, but they remain high. In isolation, it indicates future returns will be lower than past returns and international stocks have a good chance to outperform U.S. stocks. That disconnect offers an opportunity for investors in a well diversified portfolio. 

Chart: Global Forward PE Ratios

Casting a light

These pieces of information help to shed light into the future. That said, there are ways, returns could continue to surprise to the upside.  Earnings and revenue growth in 2021 has been faster than many anticipated a year ago.  In addition, current earnings estimates for 2022 are still above the historical growth rate. There are still many unknowns in the years ahead. If we focus only on the negative unknowns, it can still look pretty scary. But if we consider the positives, it helps balance the outlook and may be better than we could even imagine.

As mentioned earlier, fear of the unknown can be dissipated with knowledge.  At Security National Bank Wealth Management we work to bring you the best information and to help you apply it to decisions on achieving your goals and objectives. If there is something you would like to understand more fully, please do not hesitate to contact us for a time to meet and discuss what is on your mind.

About the Author

Michael List, CFP®

Michael List is an Investment Management Officer within Security National's Wealth Management Division. Michael earned his Bachelor of Science in Business Administration with a concentration in Finance and Economics from Creighton University and holds the esteemed Certified Financial Planner, CFP® certification. List helps execute investment strategy, transactional execution and overall portfolio management. Having dedicated 14 years to the field of Wealth Management, Michael List brings a wealth of experience to his role, contributing to the success and growth of Security National Bank since 2008.

Related Articles

Spring Cleaning:  Time to Cultivate Your Financial Plan April 15, 2024

As the old adage goes, April showers bring May flowers. Depending on where you are from or walk of life, this proverb can take on many meanings. The way I interpret the classic saying is that April represents a time for preparation. A time to do some spring cleaning and tackle projects neglected during the winter months. For farmers, it means a return to long days in the fields. For accountants, it signifies the conclusion of an arduous three months of tax preparations. At Security National Wealth Management we feel now is a great opportunity to assess your financial plan and ensure you are on the right path to achieving retirement goals.
Look What's on the Verge of a Major 40,000 Milestone April 1, 2024

In early December 2020, my colleague, Michael List, published an article marking the Dow Jones Industrial Average hitting the 30,000 milestone. In that article, Michael describes four different methods that each provide us with an educated guess as to when the Dow would cross the 40,000 milestone, with guesses ranging from two to six years. Michael said that the 40,000 milestone probably would be here faster than we expect but that it ultimately would leave us with more questions, e.g., when would the Dow reach 50,000? And now, about 40 months later, or 3.33 years, the Dow is approaching 40,000, causing us to guess when it ‘turns’ 50,000. To continue our analysis, let’s use the same methods utilized by Michael to predict the arrival of the Dow at 50,000.
Unveiling the Fed: Journey from 'The Great Oz' to Transparency March 25, 2024

One of the evolutions in my investment career was the increasing transparency of the Federal Reserve over time. Decades ago, the Fed was seen as ‘The Great Oz’, its deliberations hidden behind the curtains and then revealed to the public through its actions. Deciphering the Fed’s inner workings was a cottage industry on Wall Street. Clarity in public pronouncements was not a priority for the Fed. The environment is much different today.