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The Lost Decade

|Includes: GLD, SLV, SPDR S&P 500 Trust ETF (SPY), UDN, USO, VTI
Suddenly, everything is good again. People are happy, relieved, feeling invincible. As the Dow approaches 10,000, everybody is partying like its 1999 (the first year the Dow hit the mythical mark).  In fact, The New York Times ran a piece on Tuesday called,“Creeping Up to 5 Digits Yet Again.”
Whenever I get interviewed I am always asked the same thing, “The market has recovered, who do you attribute this to? Now that the market has surged 50%, what’s next?” These are the wrong questions to ask. The market has not recovered. We are back close to a level that we first breached over 10 years ago. When did we become complacent, happy with being just getting back to even? It is not just in the world of investing that this has become predominate. We now reward kids on losing Little League Teams with trophies. Mediocre movies (I am being kind) such as Transformers dominate the Box Office, and musicians such as Lady Gaga with little talent become the next big thing. To hear the glee among market pundits that we are approaching 10,000 is absolutely sickening.
If I’m not mistaken, the point of investing is to make money, not hope that you escape with the same amount of money that you started with a decade later. But, if you look at the real dollar return of the market over the last decade, it is actually down more than 30%, leaving the real level of the Dow closer to 7,000. Now, that doesn’t sound so good, does it? The fact of the matter is, most investors have not been able to keep up with inflation over the past decade, and have thus seen their savings wither away. There are many out there that say investing is a fools game. They might have some merit, when you consider that a $100,000 investment in a cash instrument in 2000 would leave you with about $130,000 by the end of this year. Even in real dollar terms, that’s still leaves you with the $100,000 that you started with. Not bad huh?
If given this example, how many people would still be happy with “just getting back to even?” Not many, which is exactly why we need to become realistic. As the New York Times said yesterday in their piece-
“We ran a front-page article about the Dow's first trip across the 10,000 marker in 1999. This article is being written in September 2009. Investors should hope there will not be a similar article in 2019.
Well, hoping and praying isn’t going to save your portfolio. There are things that can be done. Our economy has systematic problems that will not be fixed overnight. We are in a bear market, and need to treat our investments with that in mind:
  1. Equities should no longer be the sole investment for retail investors who participate in the market. Absolute Return strategies involving Commodities, Currencies, and Fixed Income, can now be easily implemented with ETFs.
  2. Investors should no longer put up with portfolio losses. They are not necessary and can be easily prevented. Portfolio losses are like quicksand, the more you struggle the deeper you sink.  Most people don’t realize that a 50% loss during the financial crisis, and a participation in the magical 50% gain since March, still leaves you 25% in the hole.
  3. Investors can not continue to fall victim to managers who want to be financially rewarded for just “beating the benchmark.” When that benchmark is the S&P 500, it is not so difficult to beat (which is why it still astounds me how about 70% of active managers can’t beat it).
We can not continue to put up with being average. Mediocrity is not what made this country the greatest economic force on the planet, but it will certainly lead us in the other direction. I am afraid those that do not heed my advice will be victim to the next “lost decade.”
Disclosure: Long SLV, Long UDN