Dorato News - January 2026

Portfolio Issues - Risk

We talk often about the expected return from US stocks, which most people would say is about 10%. That's held true whether you look back over 100 years, or 30.

But here's an interesting question: Over the last 25 years, how many times has the S&P 500 ended up with an annual return between 9% and 11%. Answer: Once, in 2004.

So averages can be deceptive. This is where standard deviation comes in, to help us understand the range of outcomes. For US stocks, the standard deviation is about 15%. That means two-thirds of the time, US stock returns have been between negative 5% and positive 25%.

That's a pretty wide range. And the other third of the annual returns have been outside of those boundaries. So expecting a 10% return from US stocks each and every year looks a little silly.

The higher return that we get from US stocks, as compared to other investments, comes with a healthy amount of variation, or risk. That's the price of admission for the higher returns.

We mention this now because many forecasts we read are pretty optimistic about the US economy and the US stock market. And we admit, the economy and US stock market are humming along. The last three years, the S&P 500 has returned 26%, 25%, and 15%. So why worry?

Well, we know about the wide variation of returns, and we know the banana peels of risk are out there; they just may not be obviously visible. So this is just a salutary reminder that risk is always with us, whether we realize it or not.

“Does that look like risk to you, or just garbage?”

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Market View - Prices

The movement of stock prices sometime seems like a mystery to many people, even to professional investors. The journalists who write stories about the stock market can make the price movements sound obvious. For example, a frequent headline we see is: Stocks fall on concerns the Federal Reserve will raise rates. But is that why stock prices fell that day? Who knows. Short-term movements in prices are often mysterious, regardless of the headlines. What prices are tied to over the long term is earnings or cash flow.

But prices can stray quite far from earnings and cash flow at any particular time, because investors feel particularly optimistic about the future, or particularly gloomy.

Right now, investors feel especially excited about companies such as Palantir, which uses artificial intelligence to combine and analyze data for the military, for other government agencies, and for corporations. Palantir stock sells for about 100 times current revenue, and 300 times cash flow. In contrast, Johnson & Johnson, which has about the same stock market value, sells for about 5 times revenue, and 17 times cash flow. Apparently, investors are quite excited about the future for Palantir. Palantir has been growing fast, and Johnson & Johnson slowly, so there's a justification for investors paying more for each dollar of Palantir earnings. But at these prices, investors seem to think Palantir will grow fast indefinitely.

Companies such as Palantir are why we think there's a bubble in artificial intelligence stocks. We can't tell you when the bubble will pop; we just know that prices are too high.

Because the ten biggest companies in the S&P 500 index comprise about 40% of the index, and because nine of the top ten are technology companies that are part of the artificial intelligence craze, we think it's a good idea to diversify beyond the S&P 500 in investor portfolios.

In the bond market, prices have been relatively calm. The ten-year interest rate continues to hover in the low 4% range. Short-term interest rates have inched down to about 3.5%, as the Federal Reserve has lowered rates. The ten-year rate affects the mortgage rate. Short-term rates affect what you earn on CDs and money-market funds.

We continue to think that there is some risk that longer-term interest rates will rise, either if inflation proves more stubborn than investors currently expect, or if investors start to doubt that the Federal Reserve is serious about fighting inflation. That, and the growing US debt, are why we recommend inflation-protected bonds.

We continue to get asked about gold, and we continue to say we aren't excited about it as an investment because we have no idea what an ounce of gold is worth. The current price is about $4,000. Should the price really be $1,000, or should it be $8,000? Or $100,000? We don't know. Since this is your investment money we're talking about, and not gambling money, the answer matters; and we don't have that answer. What we do know is that people often talk more about the price of something after it's already risen, and gold has doubled in price in the last two years. We also know that gold has been a poor investment over the long term. So that makes us skeptical about owning it.

We expect stock prices to fluctuate in 2026, as they typically do in well-functioning markets. The reasons may be obvious, or they may be mysterious, but prices will fluctuate. If you go into the new year with that expectation, you'll probably be able to handle those fluctuations just fine.

Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group, Schwab