Why Stock Prices Don't Matter for Long Term Investors

Investing for the long term? Ignore valuations says Tilney's CIO Christopher Godding, the best returns come from inflation and dividend yield

Emma Wall 20 July, 2017 | 12:20PM
Facebook Twitter LinkedIn

What is good value? The summer sales may have hit the high street, but thanks to a multi-year rallies, stocks in the UK, US and Europe are no longer as cheap as they once were. But according to advisory firm Tilney’s chief investment officer Christopher Godding if you are investing for the long term, stock valuations do not matter.

Looking at the sources of stock market returns decade by decade in the UK, price to earnings ratios are one of the largest contributors to gains. In the 2010s, P/E made up nearly two thirds of positive returns. But if you take a longer term view – from 1969 to 2016, P/E becomes inconsequential, with inflation and dividend yield making up 95% of total returns.

“Valuation does not matter as a long-term source of returns,” said Godding this week. “Therefore for long-term investors, the price of a stock does not matter. The entry point does not matter. Inflation and dividends matter.”

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 Basic member.

Register For Free

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Facebook Twitter LinkedIn

About Author

Emma Wall  is former Senior International Editor for Morningstar