At the risk of stating the obvious, U.S. stock market valuations are high, especially in growth stock classifications. Arguably, they are really high, in relation to past peaks. However, valuation is not a timing tool. Yes, the market can continue to push higher in spite of elevated valuations – but those valuations don’t tell us how high is too high, nor do they ring a bell to signal when the rally is over.

While valuation does not provide any signals about short-term market timing, it does provide some perspective on long-term returns. The higher the current market valuation, the lower the expected future return. When people ask me for a stock tip, my favorite answer is, “Buy low and sell high.” That tip is of little use when there is no longer such a thing as “low.” In the current market environment, it appears investors are buying high and hoping to sell even higher. They might be able to do that over the long term, but likely not at 15% annualized five-year returns like the S&P 500, or 20% like the NASDAQ 100.

Setting reasonable expectations is always a challenge. After five and 10 years of 15% annualized returns in large cap stocks, investors come to expect that same return for the next five to 10 years. I’m not saying it can’t happen; I’m saying it’s not likely.

For most investors, the savings time horizon is 40 to 45 years, during which we diligently put money aside to provide resources during our retirement years. Setting reasonable expectations for long-term returns is a key assumption in determining how much money to save to reach our intended goal. If we have a 40-year time horizon, it is reasonable to use an 8% return expectation to determine how much to save. If we plan on amassing $500,000 in 40 years, our yearly savings needs to be about $2,000. If we happen to get a 15% return instead, great. We will have a balance of $3.4 million. On the other hand, if we plan on having $500,000 in 40 years, and our expected rate of return is 15% (which is about 6% above the long-term average return on stocks), we would save $300 per year. At the end of 40 years, if our return annualized return was 8%, our savings would amount to about $78,000.

In the first example, we get to live a lifestyle we never expected to have. In the second example we are trying to figure out how to buy groceries. The moral of the story is to set reasonable long-term return expectations, then let the time value of money work in your favor.

There is a proverb that states, “The best time to plant a tree was 20 years ago. The second-best time is now.” That saying fits the concept of saving for the future. Hopefully, you started saving early. If not, start now.

As you save with an eye to the future, don’t get discouraged. If you started with $2,000 in the S&P 500 at the beginning of 2022, your year-end balance would have gone down to about $1,600. At that time, you might have been asking, “What’s the point?” However, if you maintained your discipline by saving another $2,000 in 2023 and 2024, your balance today would be $8,610. Getting to an investment goal does not happen in a straight line. Push through and keep going.

Thank you for your business. All of us at Bell Bank Wealth Management wish you a Merry Christmas and look forward to working with you in the year ahead.