The Reformed Broker: Value Creation
Investing is all about creating value. That turns an invested dollar into more than a dollar. How much depends on the risk of an investment, the holding period, and other factors such as market performance.
Value creation can be built during any market. But during a bear market, the process can be accelerated, as investors are able to buy stocks, bonds, and other assets at a discount.
With the market touching on a 25 percent peak-to-trough drop in 2022, investors who cash out now are taking a big loss.
And they’re destroying the ability to compound their wealth. That’s because they’ll likely miss out on the start of a new bull market. They’ll only get in after a big run higher, because that’s when investing feels safe.
The past year has caused stocks to move from 24 times earnings on average to 15. And cash went from yielding 0 percent to 4 percent. In other words, there’s less risk in the market, but there’s also a better return on staying on the sidelines.
Either way, that points to a better investment environment today than a year ago. It may get even better in the months ahead. But for those with time ahead of them, now would be an opportune moment to start investing or get back into the market.