The S&P 500 has surged over 60% in two years despite challenges like high interest rates and election uncertainty.

This rally has sparked investor unease, evident in rising gold prices as a “safe haven.”

A strategic approach to asset allocation is key: keep cash for short-term needs, use bonds for mid-term goals, and invest in stocks for long-term growth.

Stocks have historically outperformed all other asset classes over time, making them essential for wealth generation if held for 10+ years.

While market valuations are high, bull markets don’t end just because of duration, so sticking to a solid plan can help investors navigate volatility.

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Ever since AI took center stage, stocks have been on a near-one-way trip higher. The S&P 500 soared more than 60% in the past two years, and more than 25% this year alone.

Considering the average annualized return of the index is 9.8%, that’s pretty incredible.

It’s even more impressive when you consider the many challenges the market has faced like sky-high interest rates, growing default risks, and a contentious presidential election.

When the market rallies so much for so long, investors start to get uneasy. They wonder if this persistent calm is setting them up for a raging storm soon.

Regular readers already know gold has been quietly gaining value in 2024. The so-called “safe haven’s” popularity is a sure sign investors don’t trust this rally.

The markets are volatile. If you invest money in them, you might not earn it back in less than 10 years. That’s why savvy investors should allocate their money into four buckets.

We cover this strategy at length in the Timetable Investor—our monthly report covering macro market signals and our recommended allocation approach.

Here’s how we break it down…

First, any money you need within the next two years should be kept in cash. There’s no investment that can reliably ensure you’ll earn your money back over such a short time frame.

The second bucket is bonds… and that’s for money you’ll need in two to five years. While bonds offer lower returns than stocks, they are better than stocks at protecting value over a five-year period.

For a broader timeline—five years to a decade—you should allocate your money between stocks and bonds based on your macroeconomic outlook.

You might favor stocks if you’re feeling bullish and turn to bonds when you see warning signs in the market.

And as we said, when it comes to being “all in” on stocks, make sure you won’t need that money for the next 10 years.

Historically speaking, stocks are the best asset class at wealth generation as long as you stay invested for at least 10 years. The longer the time horizon, the clearer the advantage.

Take a look at this chart from the book Stocks for the Long Run by Wharton business school professor Jeremy Siegel. It shows 200 years of performance data for the top asset classes.

And as you can see, over the long term, stocks crush the competition…

The market’s favorite “safe haven,” gold, can’t even come close to the annualized return of stocks. Neither can the U.S. dollar, which offers a negative 1.4% return compared with 6.7% for stocks.

Bonds are the closest asset class to stocks in the long term. However, the yearly return on stocks is still nearly double that of bonds.

And thanks to the compounding effect, one dollar invested in stocks back in 1802 was worth $930,550 in 2013 while the same amount invested in bonds gets you only $1,505, the difference is more than 600 times.

Stocks simply have no competition in the long run…

Market valuations are at 24 times Uniform price-to-earnings (P/E). That’s high considering the long-term averages of the market.

Even so, the market has continued its steady rally over the past two years. And the S&P 500 rose more than 5% in the five days after the election.

All these developments have made investors nervous. But remember, bull markets don’t end simply because they’ve lasted a long time.

There’s no need to worry simply because the market is going strong. If you’re following the right allocation strategy, just relax and enjoy the ride while stocks test new all-time highs.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research