A lot of people are fretting about an overvalued US stock market. A recent Bank of America survey of fund managers said that 91% of them think US equities are too expensive. Should we care though?

After all, buy-and-hold is today’s dominant long-term investing strategy. That’s because putting aside a set amount of money for retirement each month — and not getting fussed about short-term market moves — works over a very long time horizon.

Here’s how to think about it:

• If you look at all the events that have moved markets over the past three decades, including the Covid lockdowns and the recent reciprocal tariffs, you come away happy with buy-and-hold.
• There was one big exception: the 2008 financial crisis. It shows why those close to retirement should worry.
• Still, over, say, thirty years, buy-and-hold devotees have been rewarded. For younger investors, then, they can probably ignore market noise and keep investing in good times and bad.
• Or, maybe the success of buy-and-hold and our collective faith in it is its own undoing given how high 30-year returns have become. That suggests hedging your risk.

Black Swan risk can mostly be ignored

Today’s column started with an analysis I did last week for the Bloomberg Terminal audience as stock market volatility reached its 2025 nadir, which only happens when stocks are going up. That’s potentially a contrarian signal, in that low volatility also signals complacency and vulnerability to event risks that can cause stocks to fall.

You can count the number of discernible spikes in the S&P 500’s volatility index over the past three decades on your fingers.

If you went back and looked at those spikes, you’d find that they were all the result of market declines due to out-of-the-blue events like the 9/11 terrorist attack — what’s usually called Black Swan risk.

Here’s the thing: the lasting effects of those risks always petered out over time in all cases except in 2008 when the financial crisis ushered in the longest downturn since the one that began the Great Depression in 1929. Even in 2020, the Covid recession was short-lived because of heaps of fiscal and monetary stimulus.

The conclusion: event risks only matter if they durably shake the economy.

By now, you’ve probably seen the chart I’ve been highlighting about rolling decade-long equity returns on the S&P 500.

It’s essentially a pendulum that swings between wildly overenthusiastic investors driving up valuations and fearful traders selling shares and driving their values down. This chart shows the real danger for investors. If you happen to retire around the periods when the market is fearful, your nest egg will suffer. 

There’s a different story when you look at rolling 30-year inflation-adjusted S&P 500 returns. I found two things.

First, there were no periods of deep negative returns. Where decade-long S&P 500 returns bottomed at a soul-crushing -57% after inflation in 1982 and again at -54% in 2009, the lowest return we saw over 30 years was 3.6% in 1985. That’s pretty poor, but at least you wouldn’t have lost money.

The second (and perhaps more obvious) point is that the chart looks totally different. The oscillations between deeply oversold and incredibly overbought shares is gone. We see what I would label ‘pessimistic middle’ period from the mid-’80s to the mid-’90s that are the fruits of the preceding stagflation. Otherwise, the returns look good.

Buy-and-hold works

There are a few conclusions here.

First, the 10-year return chart is also further reason to ignore “Black Swan” risk unless it shakes the economy for a good while. There’s no correlation to the aforementioned volatility spikes. When the VIX spiked in 2008, inflation-adjusted 10-year returns were headed down. By contrast, 10-year returns were high in 2000 and in March 2020. The brief recession knocked stocks off their perch, but fiscal (and monetary) stimulus soon propelled them to new all-time highs. It's the business cycle that matters, not event risk.

Second, if you’ve got a very long time horizon, you’re probably okay sticking with buy-and-hold even through economic downturns. Over a decade, returns can sometimes look awful. But over the very longest periods, things look better. 

Third — and I think this is where I get into the ‘alternative’ interpretation below — the increase in 30-year returns across business cycles since 2000 looks totally unsustainable. We hit a high in December of 30-year inflation-adjusted returns of 529%. That’s 6.6% a year for 30-years. That leaves me a bit uncomfortable.

What 2008 taught us, summing up the work of the late economist Hyman Minsky, is that stability breeds instability. Humans are prone to pushing the limit. So whenever we individually or collectively get comfortable with any situation, we add a little risk on top! Just look at the recent China tariff policy.

That increased risk can crystallize in big losses. 

I look at the 25-year increase in very long-term equity returns the same way — as a de-facto sign that more risk is being taken. We just don’t know how yet.  what got us here is that after the dot-com crash, a lot of people felt burned by active fund managers who had just eviscerated their investment nest eggs. They sought solace in the safety of buy-and-hold: so-called passive investing. This trend got more popular after the Great Financial Crisis and then after the pandemic plunge in 2020. By the end of last year, investors deploying that strategy saw a record inflation-adjusted return for all periods going back to 1962.

Herein lies the problem. It’s not just the very high long-term 30-year return. The stability of the last 16 years — with only the briefest of downturns — has caused stocks to reach heights that simply make them vulnerable. That’s what famed investor Howard Marks says. When you look at valuation too, whether it’s the price-to-earnings or price-to-book ratio, we are now at some of the highest levels in history.

It feels like hedging the risk during the next downturn rather than blindly buying the dip makes the most sense. The very success of the buy-and-hold strategy has landed us in a place where buying a seemingly diversified S&P 500 index is in many ways a concentrated bet on the biggest technology stocks. Yes, they’re money-earning machines. But there’s a risk like during the Internet Bubble, where if technology falls, everything falls.

For me, it’s worrying that just seven companies make up almost 40% of the S&P 500, such that when they put out poor results — as they eventually will — the selling of index funds will send the whole market crashing down.

All I know is that when the economy does turn down and Big Tech stocks follow, lightening up on their weight in my portfolio and expecting new market leadership will certainly help me sleep better at night. 

Things on my radar

• The US Treasury Secretary has a model of interest rates that defies Fed models (and logic).
• Bessent also thinks that tariff policy on China is working just fine. That suggests 30%+ levels are here to stay. Stability breeds instability again.
• On that score, the fact that the economy hasn’t fallen apart has encouraged the Trump administration to further intervene in Corporate America. Take the government’s proposed investment in Intel.
• Trump is also looking to influence monetary policy by forcing anyone who is not a potential ally to resign at the Fed. Look at what’s happening with Fed Governor Lisa Cook, a Biden appointee.

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