Beware of Market Performance Myths

This is a good article about market performance myths. It's worth reading in this day of doom, gloom, and Wall Street incompetence. The quick summary: don't take claims of historical market performance at face value (not to mention fund and manager performance).

The author points out that it is easy to make dramatic claims (in today's environment, that's often negative claims - e.g., a recent Newsweek cover article saying that stocks made no money between 1965 and 1982) by cherry-picking the starting and ending points, ignoring dividends, and using indices that don't truly represent the market.

The usual suspect here is the Dow Jones Industrial Average. Never forget that it is merely 30 companies, and that the index is PRICE-weighted. That means that a stock with a price per share of $100 has 10x the effect of a stock with a share price of $10. It completely ignores the fact that the $100 stock could have 1M shares out and the $10 stock 4B shares. The S&P 500 at least is market cap weighted.

For example, look at all the talk about this potentially being the lost decade, the only decade this century with negative stock market return, etc. Sure, but what was the starting point? The top of the biggest stock bubble ever seen. Yes, if you bought an index fund on Dec. 31 1999, you are in bad shape. So what? If you bought an index fund on Sept 30, 2002, you're up. Again, so what? So these kinds of headlines are silly. And they always assume you buy on day one, hold the entire period, and don't buy any more.

I can pick two points in stock market history that will "support" any argument I want to make. In 1999, everyone was jumping on the "Dow 36000" bandwagon which got many folks in near the top. In the same vein, articles like this Newsweek gem are keeping people out of the market when this is likely to be one of the all-time best buying opportunities ever, assuming a long horizon.

Comments

[Tradememe:]

"And they always assume you buy on day one, hold the entire period, and don't buy any more."

That is usually the silly reasoning that everybody makes when they say the buy and hold strategy does not work.

Feb 12 05:03 AM

[DrewS:]

I concur. Your positions apply to many topics...

"It is important to note that the great claim of asset allocation relates to the risk reduction achieved by diversifying over several broad asset classes (i.e. stocks, bonds, cash and real estate) without a similar reduction in return. However, the risk reduction is strictly theoretical (typically based upon relationships that existed over a particular period with no guarantee that these same relationships will continue in the future). This is the crux of where asset allocation or modern portfolio theory breaks down. Risk is not defined; instead it is merely expressed in historical standards. " - Randy Swan, 1997

Feb 12 09:16 AM

[ROLEX18:]

Everything is myth, even when you look into your account statement and it is down same as the market, it is also myth as as long as stocks are on paper they are worth the paper, only when you cash in what's left and count it then it's not a myth.
Wall Street is a scam where one factory worker supports with his savings a family on one financial dingo.

Feb 12 12:52 PM

[doubleguns:]

Rolex --guess what when you cash it in and count it dont you think that paper money is a myth too!!! Gold is the only currency that is not a myth.

Feb 12 01:23 PM

[prudentinve...:]

You say: " In 1999, everyone was jumping on the "Dow 36000" bandwagon ....."

Everyone?! Only the inexperienced and the gullible, of which there are many, but by no means everyone.

Feb 12 01:42 PM

[Fred Voetsch:]

Yes, sir, you SHOULD be a buyer as we need someone to buy on the way down. I assume that you were a buyer a year ago as well?

I was not and I still am not a buyer and won't be until the DJIA gets well below 5,000. There are plenty od reasons but I have stated them so many times my fingers are sore. See www.generationaldynami... for one of the best explanations.

Feb 12 03:15 PM

[jeff m110:]

freddyv : thanks for the link , he's got some very interesting ideas there..
Something I've been wondering about - will succeeding generations be much inclined to work actual jobs, considering the debt load and increasing contributions to the social security ponzi scheme will tend to make bartering or subsistence farming look more attractive , relative to a job paying a debased currency and with large deductions? Also, I think theres an attitude shift underway, towards less consumerist lifestyles.
One thing I remember from the 70s, barter became rather popular. A continuation of policy which passes debt to future generations seems likely to run into some limit. Debt = slavery.

Feb 12 05:22 PM