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Diversify and keep investing

Date: 04 December 2025

5 minute read

Autumn Budget 2025

‘Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.’

A few weeks ago I wrote about talk of a bubble in AI stocks, concluding that although prices in certain pockets of the market look toppy, the AI theme is broader than just the Magnificent Seven and likely has further to run. Since then, we’ve continued to receive inbound questions as to whether a correction is coming in 2026 and what to do about it.

Broadly speaking there are two concerns driving these questions. The first most basic one is that we’ve had a good run. The US equity market has returned over 50% in the past 2 years, so there’s a feeling that wheels will surely fall off soon. The second is that the market looks expensive. The trailing price to earnings ratio of the US large cap market has only been higher than it is today 8% of the time since 1990.

What do the numbers say?

Using monthly returns data going all the way back to 1930, there have been 204 months where the returns from the US equity market in the prior two years were more than 50%. In two thirds of these months, the returns delivered over the subsequent year were positive. If you extend this out 5 years, returns were positive 4 out of 5 times, and over 10 years they were positive 19 times out of 20. So on its own, the fact recent returns have been so strong isn’t something to worry about too much.

When we consider valuations, the picture is a little different though. Our data doesn’t go back anywhere near as far (only to 1990), but there have been 30 months when the trailing price to earnings ratio of the US equity market has been at current levels or higher. 83% of the time, returns over the following year were positive, which is a great hit rate and should provide some comfort to keep investing.

However, as you extend your time horizon out, your chance of positive returns steadily falls rather than rises to the point that over 10 years you would have received a positive return only 60% of the time. So more likely than not, but perhaps with a lower probability than you expected.

At first glance this might seem surprising – surely the longer your time horizon, the better your chance of making money, right? Well, sort of… but there are two factors at play here.

The first is momentum – expensive things can always get more expensive – so valuations are a horrible signal for short-term market timing. The second is that when prices are expensive (or yields are low) you should expect lower future returns, but knowing when these lower returns will begin is nigh on impossible.

What have we learned that we can apply to how we invest?

We shouldn’t be surprised if US equity returns are lower in the coming decade than they were in the last. This could happen via the route of several years of lacklustre returns, or there could be wild price swings. No one knows how it will play out, but it certainly makes sense to diversify and invest outside of US tech and into areas where valuations are less stretched. Despite all the AI hype, European banks have returned even more than the Magnificent Seven over the past 2 years, so there are other opportunities out there.

And if you are tempted to run to cash and wait for a sell off, remember there are two things you need to get right. The first is when to get out of the market - being early is no different to being wrong as you miss out on returns – and the second is when to get back in. The turning point at the bottom usually happens when the outlook is still pretty awful, just a little less awful than it was yesterday, so it won’t feel like a comfortable time to invest.

Also, rebounds from market troughs happen sharply, and when you miss out on the first 10% of a rally it is hard to convince yourself to buy rather than wait around for a pullback. Meanwhile the market typically rallies some more, amplifying your regret, and leaving even more returns on the table.

Of tangential relevance is a comment we have heard a lot in recent months - clients are waiting to get past the Budget before they invest new capital. On the one hand this seems eminently sensible – it is a risk event that you do not have an edge in predicting (although the leaky bucket that is the OBR helped a little bit on the prediction front). However, these comments were never accompanied by a plan of action for different eventualities, so I wonder what it was people were waiting to see in the Budget, or if they would even know it when they saw it. These clients had money that they were always going to invest, so why not get on with it?

At time like these, Peter Lynch’s quote comes to mind: ‘Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves’. This helps make the point that the best bet is usually to keep calm and carry on investing.

Key Takeaways

  • Even after several years of strong equity returns, the chances are the market keeps rising.
  • High starting valuations mean lower long-term returns are more likely.
  • Timing the market means getting out AND getting back in at the right time.

CJ Cowan

Portfolio Manager

CJ is a portfolio manager of the Quilter Investors Cirilium and Monthly Income Portfolios. CJ joined Quilter Investors in August 2018 from Aberdeen Standard Investments where he worked in the global macro team, managing global government bond and global aggregate portfolios.

CJ is a CFA charterholder and has also completed the Chartered Alternative Investment Analyst qualification. CJ has a degree in economics from the University of Bristol and an MPHil in Economic and Social History from Brasenose College, University of Oxford.

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