When evaluating an investment over decades, using P/E may not provide the best tool. For trailing P/Es, it weights the price of the stock to earnings – or what the company has made. For forward P/Es, it’s about evaluating the price of the stock to earnings next year. Neither evaluate the earnings of the market 30 years from now, nor would an estimated 30-year P/E provide a reliable measure.
Over the past 40 years, the average P/E of the S&P 500 came in at 21.9, which indicates that the market is currently cheaper than historical average. But the P/E average from 1971 to today fell in atThe same battle can be waged when comparing to more recent figures. The P/E looks like a deal compared to December 2020, when it stood at nearly 40. But when looking at December 2018, the number looks loftier, as the P/E then was under 19.
Looking for that perfect time to jump in, based on this measure can leave you doing a two-step, with one foot in and one foot out. Based on recent history, though, it certainly provides support to landing a cheap spot to purchase now.Buying more now, when asset values drop creates a real opportunity for you to supercharge your savings if stocks rise in the future.
It’s simple math and highlights the value of dollar-cost averaging. When stocks are cheap, if you’re putting in a specific amount of money each month, then you will gain more shares than when stocks are expensive. If you invest $500 in a market index fund when it’s priced at $250 per share, then you gain two shares. If that rises to $350, then you gain about 1.4 shares. Again, simple math.
This gives those that want to begin their investing journey a potential opportunity to begin when their money will go a little further. While inflation may have impacted the ability to buy food, it has made stocks cheaper in the short term. You might as well take advantage of a deal while you can.While many economists expect a recession in the next year, how deep of a recession we experience remains to be seen. Nor do we know how such a pullback will impact market returns.
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