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.

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.

To Read the Full Story, Subscribe or
This article was written by a professional financial journalist for Meg Green & Associates. and is not intended as legal or investment advice.

© 2019. All Rights Reserved.