Inordinate amounts of time, ink, and bytes are spent touting both ends of the market, and chances are that during the 1960s and 1970s some were calling for Dow 2,000 while others were pointing to 200. I’m too young to remember and too old to care. In 1983 the Dow broke through the 1,000 level and eventually conquered the 2,000 mark. But the waiting was excruciating. In addition if one looks at the high in 1929, the break-even point was reached only 26 years later.Click to enlarge
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On the doomsday side we often hear how the Japanese market has lost 75% of its value since 1989, and that is a glaring reminder that investment evaporation can reoccur. It’s true, especially considering common retirement planning scenarios where one puts a few eggs in a basket and 20 years later a chicken farm magically appears.
On the infinite boom arena, the lyrics point out that history shows that the historical, inflation-adjusted, average return has been between 6% and 7%. In addition, a plethora of valuation tools is thrown in to supplement a variety of assumptions mostly based on straight line economics. Plausible!
The chart above depicts the Dow Jones Industrials up to the recent high, and I bring attention to the period between 1962 and 1982, which by the way includes roughly 50% of the time under the gold standard, while the second half lived with “fiat” currencies. But that’s a whole different debate.
One can go a step further and extrapolate that we are smack in the middle of something that looks like 1962-1982 all over again. If that is the case, and we use 20 year periods, the current cycle started in 2002 and we have another 11 years to go. Will it happen? I don’t know, but history can also be used in this case.
In short, America experienced 20 years of going nowhere fast from a stock investment perspective. But the fact that the much advertised average stock return is largely irrelevant to those that lived through the period, is not the main point. The idea is that through the valleys and peaks, opportunity existed, and only if one was asleep at the wheel, or subscribed to a historical, somewhat baseless idea, of a quasi “guaranteed” return that occurs over an ill defined long-term period, one would wake up after a 20 year mental absence looking for the promised chickens.
What caused the run-up between 1982 and 2002 when the farm was delivered as promised? Not sure and plenty of opinions exist. I can only say one thing for certain: The S&P 500 futures contract was introduced in 1982, and I am opening the door to derivative conspiracy theories. The 1,000% percent increase during the 20 year period can also be used today, and that would put the Dow well over 100,000. Thus why stop at 20,000?
As I scan the web for stories on the subject of volatility, the story stays the same, and I chose one article by Reuters, titled “Insight: The madness of Wall Street.”
And that's something that could have long-term ramifications for the ability of investors to build retirement nest-eggs, especially given the historic poor ability of retail investors to time market swoons and surges. A portfolio with 20 percent in cash, 50 percent in a bond fund yielding 3.42 percent a year and 30 percent in stocks isn't going to enable a person in their 50s to retire any time soon.
Overall, I agree with the math, but one item jumped off the electronic page: “Historic poor ability of retail investors.” I know that’s the pick-up line often used, although professionals don’t seem to fare much better. But if one knows one’s shortcomings, why not ask the tough questions and improve investment skills to ensure a better end result? It’s only your livelihood on the line!
So where do these extreme forecasts come from? Once again, not sure, and I will refrain from including demeaning adjectives. However, there’s probably a profitable shock value associated with them. Let me put it this way. On wedding day all of us say “till death do us part,” yet the divorce rate in the U.S. is 30% to 40% for first marriages, depending on whom you ask. The point being that when we have far more control over predicting the future, we fail to do so miserably, yet projections of Dow 20,000 and 2,000 abound.
Trust me. If I was looking for clicks and page views, I could find plenty of nonsense and write convincing articles that would justify either extreme. But as entertaining as the stock market may be at times, this is not “TMZ.” Instead I choose to look for honest opinions without having my head buried in the sand, and always seek opportunity regardless of market and economic weather patterns.
Recently I received a call from a gentleman at my bank looking to develop the institution’s investment services department. After a very cordial introduction, strategy talk, and how he saw the pot of gold at the end of the rainbow even in this tough environment. I told him my conditions.
“If you want to manage my money, I expect a reasonable 12% annual return after fees,” I said. “Furthermore, if during any one year period the return is below 12%, the bank must agree in writing to make up the difference, and I truly don’t care if you invest in dividend paying stocks, technology, energy, bonds, or polar bears.”
He replied that over the long-term – 10 or 20 years – a 6% to 7% average return is normal. In addition, that’s the reality of the investment world, and that encompasses some losing years. “Well, I can do that with index funds, supposedly, and I think that we have very different definitions of long-term,” I added. “To me, one year is long-term. After the New Year’s party is over, a new long-term period begins.”
All strategies are excellent as long as they deliver the goods and comply with expectations. But only one thing is certain: I don’t take the chicken farm for granted. As far as the demise of the world is concerned, I’ll die before it happens – and I plan on living to 150.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.