And that’s just the tip of the iceberg: There are an estimated 30,000 U.S. corporate bond issues outstanding and a million different municipal bonds. With so many issues on offer, it’s hardly surprising that—when investors and market makers get spooked and become reluctant to buy or sell—the bond market doesn’t function so well.
5. If we wait for stocks to get cheap before buying, we’ll likely wait an awfully long time.
After 2020s brutal first quarter, you might imagine that U.S. stocks would appear cheap based on yardsticks like dividend yield, price-to-earnings (P/E) multiples and cyclically adjusted P/E multiples. And shares are indeed cheaper, but they’re hardly bargain priced by historical standards.
Of course, we may get there yet, but I wouldn’t count on it. Even if share prices fall further, we’re likely to see disappointing corporate earnings and cuts in dividends, which may conspire to make stocks look more expensive, not less. On top of that, stock market valuations have been trending higher over the past four decades. That trend, I suspect, won’t ever reverse.
6. To earn handsome long-run returns, we must run the risk of severe short-term losses—and those losses occur with brutal regularity.
Over the past 50 years, we’ve had the 1973-1974 stock market crash that accompanied the OPEC oil embargo, 1977’s market decline, the early 1980s stock market swoon born of skyrocketing inflation and a double dip U.S. recession, 1987’s harrowing market crash, the 1990 slide triggered by Iraq’s invasion of Kuwait, 1997’s Asian Contagion, the 2000-02 slump unleashed by the dot-com bust and the 9/11 terrorist attacks, the 2007-2009 crash driven by the Great Recession, 2018’s losing year and 2020s coronavirus crash.
The bottom line: Big market declines happen at least once a decade, and yet we’re shocked—shocked!—every time. To grasp the stock market’s turbulence, check out the annual returns for the S&P 500 . The frequent losses may strike some as unnerving, but I’m comforted by looking at the year-by-year results. I remember so many of these declines, including the anguished declarations of doom, and yet every one of them proved fleeting.
7. If an investment offers high expected returns, there must be high risk—even if we can’t figure out what that risk is.
When the S&P 500 was at its all-time high just over six weeks ago, I suspect the vast majority of investors knew that owning stocks was risky, even if they didn’t fully appreciate the magnitude of that risk. After all, even when stocks are rising, it’s hard not to notice the day-to-day turmoil.
Instead, I suspect today’s most surprised investors were those who loaded up on rental real estate. In particular, I think about the folks who took out large mortgages to buy apartments and houses, and then aimed to cover their borrowing costs with short-term rental income from customers of Airbnb, Vrbo and similar services.
It might have looked like easy money (or somewhat easy, given the work involved in cleaning up after short-term tenants) and less risky than being the landlord of a single tenant, who might fail to pay the rent and prove difficult to evict. But as we’ve discovered, there was a serious risk—the risk that the entire world would hunker down at home and stop traveling.
This column originally appeared on Humble Dollar. It was republished with permission .