Evolution and Adaptation Are the Name of the Game

 |  Includes: DIA, QQQ, SPY
by: Roger Nusbaum

Long time reader Leisa left an interesting passage from a white paper of sorts that challenges the assumption that the stock market returns 10% per year over long periods of time.

Asking questions about these sorts of truisms is always worthwhile, and something I should do more of on the blog.

Before I get too into this, let me say a little something about where I am coming from professionally and personally.

Professionally I am just trying to help people get to where they think they need to be over the time period they need. Because I spend 75 hours a week (my wife's count) on this endeavor I feel like I am doing the best I can to find and understand different asset classes and countries to own. I can guarantee no result, but the effort is exhaustive.

I don't care about ever writing a white paper or other research. I deal with people and their money, so too much focus on academic issues becomes a distraction from the way I think the job should be done.

I certainly will not have any definitive answers here, just how I look at the possibility and, as Leisa says, maybe this can spur some good discussion.

Personally we save as much we can, live below our means, and I hope to continue my work until the end. If somehow returns from the capital markets are not what my plan calls for, I will save more. We have created a lifestyle that will accommodate this should it ever become necessary.

The paper linked to above notes that from 1900 through to 2002 the average return from 16 different countries was 5% before fees and taxes. The excerpt does not disclose the 16 countries, but from a kick-the-tires viewpoint I am not sure there is much value in studying all but the two or three biggest markets from the period before World War II. How developed were these markets in the 1910's and 20's? The notion of evolution and modernization has to matter some, doesn't it? For some perspective on this point as recently as the 1960's, the U.S. market closed early on Wednesdays to catch up on paperwork.

Below are the closing levels of the S&P 500 every ten years starting with 1930 according to the Trader's Almanac.

1930: 25.92
1940: 12.77
1950: 20.43
1960: 60.39
1970: 93.46
1980: 140.52
1990: 368.95
2000: 1527.46
Click to enlarge

A statistic I recall from my time at Fisher Investments was that stock outperformed bonds over 15 rolling year periods what I believe was 92% of the time.

Above I mentioned evolution. This is a word I have used many times before in writing about investing. Capital markets and investment products evolve. If this is true then it must also be true that portfolio construction must also evolve. I have been writing from the start of this blog that future investing success will have to come from a willingness to own new - to you - investment destinations and new - to you - asset classes.

To the extent the white paper is correct, one focus of this blog has been the exploration of many different investment themes that are somewhat, if not entirely, consistent with the conclusion drawn. To the extent the white paper is wrong, challenging generalized assumptions with some real depth should make you more knowledgeable about markets and portfolio construction.

One last point: As you navigate through the markets over time wrap your hands around the possibility that you will need to save more.