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Secular bear markets and a river in Egypt

Thursday, February 26, 2009

I don't know. I suppose that if most of what I did over the last few decades revolved around compelling individual investors to buy stocks for the long run, come what may, it might be difficult to look at things objectively.

Denial is a powerful force in the world and perhaps one of the most under-appreciated.

These days, a lot of people are having a very hard time with the whole idea that individual ownership of stocks (and now real estate) is not the panacea that they once thought.

That doesn't, however, stop them from encouraging individuals to just "tough it out", likely knowing that, eventually, their advice will pay off - whether or not that advice will pay off in time to fund the retirement of a generation of baby boomers is another question entirely.

Word comes this morning from the Wall Street Journal's always-interesting Jason Zweig that it might be some time before things are hunky-dory again.

In this story coming in advance of tomorrow's update of long-term investment returns by finance professor Elroy Dimson of London Business School, the news is decidedly unfriendly for your typical aspiring retiree with money in the stock market.

The good professor estimated that we'll have to wait nine more years before stocks have even half a chance of hitting their highs of 2007. That is, back when millions of baby boomers started eyeing their retirement account balances again as the housing bubble was meeting its pin.

Those aren't very good odds at all - a 50 percent chance in nine years? 2018?

Who knows what the condition of the U.S. or global economy will be by then?

If you're still sticking with the program of "stocks for the long run", maybe this report at Money Magazine will cheer you up. In one of the daffiest assessments of equity markets that have crossed my computer screen in quite some time, Paul J. Lim, a senior editor at Money Magazine explains how the lost decade that just occurred, really wasn't such a loss.

Yes, it's true that the Dow Jones industrial average sits more than 1,000 points below where it was 10 years ago. But that's irrelevant to your investing strategy for three reasons. First, it's an arbitrary amount of time. We're hung up on it because 10, as University of California-Berkeley finance professor Terrance Odean notes, "is a nice round number we can all relate to."

Second, the market's performance over the past decade is a red herring because the period you're judging starts near the absolute pinnacle of irrational exuberance, when stock valuations - as measured by price/earnings ratios - were absurdly high. If you measure from the end of the last bear market, in October 2002 - when stock prices were still higher than average, by the way - you'll see that the Dow has returned 4.5% a year (including dividends) while the Standard & Poor's 500 index has gained 3.4% annually.

Third, as T. Rowe Price financial planner Stuart Ritter notes, "The only people the lost decade accurately applies to are those who invested absolutely nothing before the late 1990s, put all of their money in at the market peak and invested absolutely nothing ever since." If such an unlucky soul does exist, history suggests that he'll be rewarded.
And, the moral of the story is, of course, stick with the plan - stocks for the long run.

Eventually they'll all be right again... time uncertain...

I'll never forget that info-session back in 2001 when I was first coming of age with this whole stock market/retirement planning trip when the Fidelity rep hemmed and hawed when he was asked why we should continue to invest in stocks after an eighteen year run had just come convincingly to an end the year prior.

I asked, "Don't these markets move in long 'secular' cycles of 15 or 20 years? If so, doesn't that mean that we're due for a 'secular' bear market?"

He didn't really know what to say - he was just a twenty-something trying to stick to the script before a crowd of thirty- and forty-somethings who were starting to think seriously about their retirement planning.

Some, more than others, obviously.

Jason Zweig is a fabulous writer and Money Magazine is great for evaluating whether or not you should upgrade your kitchen, but I stopped listening to their investment advice years ago.

That was a good decision.


Anonymous said...

I have a naive question pertaining to the statistic you cite (Dow gained 4.5% a year, etc): What level does the Dow have to get down to so that the math will tell you that the Dow has returned 0% over the last 20 yrs, 30 years, etc. I think it might be insructive. BTW was that quoted gained before or after taxes and inflation?


Tim said...

U.S. stocks (including dividends) are back at the levels of late-1996 or early 1997. If you go back to the early 1990s or before, there are significant gains. All cited increases are before taxes and inflation.

barnaby33 said...

Just once I'd like to see one of these ass-munch arm chair economists say, "I was wrong, I'm sorry." I know it won't happen but it sure would be nice.

Whether or not the market goes any lower(which I know it will) or not, isn't relevant to the lost decade. Something the author you quoted seems to overlook. Most people just look at their brokerage statement and remember high water marks. If you've lost 50%, you don't remember that you've gained 200. Just that you are half as rich as you once were.

Anonymous said...

A long time ago, a finance professor told us that if you lose 50%, it takes a 100% gain to get it back.

$,1000 - $500 = $500 (50% loss)
$500 + $500 = $1,000 (100% gain)

I never forgot that...

Anonymous said...

The secret of success in stockmarket investing is to buy stocks when they are cheap. If they aren't cheap when you happen to have money available, try to find some other investment that is.

Or such is my conclusion, anyway.

Anthony Alfidi said...

Money Magazine et al. are always aiming to deliver you to their advertisers - investment firms who earn fees when all of your money is in their actively-managed products. That's why their columns are edited to trigger a fear response: "Gee, I don't want to miss out on all those gains."


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