Front Page|Our Services|Our Team|Client Center|Financial News|Events|Contact Us

Financial News

More Articles  Printer Friendly Version

 

Stocks Plunge When Investors Earn The Equity Risk Premium

The plunge in stock prices means it's time to earn the equity risk premium. Here's a reminder of this important fundamental financial concept of investing.

The risk premium is what you get paid for owning a risky asset.

A rubric of modern portfolio theory taught at all major colleges and universities holds that investors get paid extra returns annually for taking risks.

To quantify the equity risk premium, here are the numbers: The 90-day U.S Treasury Bill averaged an annual return of 2.07% for the 21 years and 11 months ended in November 30, 2018, according to Advisors4Advisors, a news service for financial professionals, compared to a 7.15% annualized return in the same period. This period of nearly 22 years encompasses two full economic and stock market cycles — the tech-bubble bursting in 1999 and the global financial crisis of 2008. Both economic cycles were followed by brutal bear markets.

The difference between the 7.15% average annual return on the S&P 500 index and the riskless T-Bill is 5.08%. That was the extra return annually averaged on equity invested in America's 500 largest publicly held companies in the 21 years and 11-month period ended November 30, 2018.

The recent plunge in stock prices follows an amazing 10-year bull market was no huge surprise, in the context of the equity risk premium, and it is always important to remember this important fundamental of investing in times of stock market losses.


Email this article to a friend


Index
A Dramatic Pause, As Expansion Breaks Longevity Record
The Explosion In Real Retail Sales You Never Hear About
Amid Signs Of Weakness, Fed Reverses Course; Stocks Rally
Three Stories Affecting Your Wealth This Week
Buried In The Fed's Financial Stability Report, A Potential Risk To Investors
Forget Everything You Know About Inflation
China Trade War Sparks Fear But Not Stock Losses
Surprisingly Good Productivity, Jobs, Inflation And Trade News
Stocks Break Record High On Economic Surprises
U.S. Leading Indicators, Retail Sales, And Atlanta Fed Forecast Signal Strength
S&P 500 Closes Near Record High Amid Growing Ebullience
An Early Indication The Economy Is Stronger Than Expected
A Spectacular Quarter For U.S. Stocks Just Ended
Real Economy Strengthens, Yield Curve Inverts And Mueller Report Drops
Despite Crises, Economic Fundamentals Are Strong
How Misperceptions Spread And Cause Confusion On Money Matters

This article was written by a professional financial journalist for Vantage Point Financial Services, LLC and is not intended as legal or investment advice.

©2019 Advisor Products Inc. All Rights Reserved.
© 2019 Vantage Point Financial Services, LLC | 329 Regency Ridge Drive, , Centerville, OH 45459 | All rights reserved
P: 937-432-1111 | F: 937-432-1110 markblack@vantagepointadvisor.com |
Contact Us

Privacy Policy

Securities offered through First Allied Securities, Inc., A Registered Broker/Dealer, Member: FINRA/SIPC. Advisory services are offered through First Allied Advisory Services, Inc., A Registered Investment Adviser.

This site is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security which may be referenced herein. We suggest that you consult with your financial or tax advisor with regard to your individual situation. This site has been published in the United States for resident of the United States. Persons mentioned in this site may only transact business in states in which they have been properly registered or are exempt from registration.