Welcome to the new my.morningstar.com! Learn more about the changes and how our new features help your investing success.

Valuations Aren’t Great for Timing Investments

Valuations are helpful for gauging expected returns, so it isn’t prudent to completely ignore them.

Alex Bryan 25.04.2019

Value investing is probably the most intuitive investment strategy there is: Buy what’s cheap and avoid or sell expensive alternatives. Valuations have an undeniable impact on investment returns. The higher they are, the lower future returns tend to be. Yet, valuations don’t appear to be very helpful for tactical adjustments across regions, sectors, and factors, or for timing exposure to credit risk.

Valuations Matter, But …

Valuations are only moderately predictive of performance. For example, from January 1970 through January 2019, a 1-point increase in the MSCI USA Index’s price/earnings ratio was associated with a 0.72% decrease in returns over the next year, while lower valuations had the opposite effect. However, valuations could explain only a small part of the variation in stock returns over this period—6% to be exact. So, the market’s current valuation says little about what its return over the next year will likely be.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Member.

Register For Free

About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA is the Director of Passive Fund Research with Morningstar.

Audience Confirmation


By clicking "accept" I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See "Cookie Consent" for more detail.

  • Other Morningstar Websites
© Copyright 2021 Morningstar, Inc. All Rights Reserved.      Terms of Useund      Privacy Policy.
© Copyright 2021 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy        Cookies