Focusing on the short - term can be paralyzing. Despite the overall rise in the stock market over the past year, individual investors have generally avoided stocks. One way this can be seen is in the very modest inflows to mutual funds that invest in stocks relative to those that focus on bonds. We often take the view that volatility can offer an opportunity to be tactical when investing by taking advantage of temporary mispricing in the markets. However, those who avoid making tactical changes in their portfolios and hold a long - term, strategic perspective are often worried when volatility picks up. These investors can take heart. We believe the next 10 years may be better for stock market investors than the losses suffered during the last decade.

We believe that history has made it clear that the most consistently accurate guage of long-term stock market returns is the S&P 500 price-to-earnings ratio (P/E). The P/E is obtained by taking the price level of the index and dividing it by the earnings per share over the past four quarters. Essentially, the P/E is how many dollars investors are currently willing to pay per dollar of earnings. It makes sense that the price you pay when you buy a stock can have a big impact on your return. The levels of the P/E and the annualized return on stocks over the next 10 years have a very close relationship. The higher the P/E, the lower the return over the next 10 years, although past performance is no guarantee of future results. Currently, this relationship suggests that single-digit gains are likely, on average per year, for the stock market over the next 10 years.

Based on P/E, investors should have felt confident of long-term gains and have been putting money to work in the stock market over the past year. However, many stayed on the sidelines and believe that it is different this time given the troubled banks, European credit problems, geopolitical tensions, risk of rising inflation, U.S. budget deficit, and rising tax rates among other concerns. We do not dismiss these issues. However, the P/E has been a good indicator of long-term returns over the entire history of the S&P 500 index—going all the way back to the 1920s!

Investors have always faced challenges. Since 1928, the S&P 500 has weathered massive bank failures, a dozen European countries defaulting, world war, double-digit inflation, top marginal income and dividend tax rates of about 90 percent, the percentage of U.S. government debt-to-GDP (Gross Domestic Product) at double the current level, not to mention the Great Depression. And yet, through all of these unprecedented events the P/E remained a consistent indicator of future long-term returns.

The current annualized loss of about 2-3% over the past 10 years is a result of the record high 30 P/E 10 years ago in early 2000. However, we believe the current P/E of about 16 forecasts a better decade for performance ahead.

It is important to note that when looking at indicators, such as the P/E, it simply tells us what happened in the past, and is not a guarantee. In addition, the P/E of an index will only give an idea of what the market as a whole may do, and not any individual stocks.

Often, investing can be emotional and the near term clouds of uncertainty too often obscure what we may feel more certain of over the long - term. This simple relationship between P/E and return gives us hope that it is not different this time. It is easy to focus on all that could go wrong and assume it is insurmountable, but the history shows us that what really matters is the price we pay and not so much what happens along the way.