This past week has seen the market struggle due to continued weak economic data, rising tensions between Russia and the Ukraine and an extended bull market run. As I discussed in yesterday’s missive, the market internals are showing some early signs of deterioration even though the longer term bullish trajectory remains intact. Therefore, this week’s“Things To Ponder” wades through some broader macro investment thoughts from the safety of your investments to how market tops are made.
1) The Delusions Of Real Returns by Brett Arends, WSJ
This is a topic that I discuss very often with clients. Past performance is no guarantee of future results and making investment decisions based on such is likely going to leave you very disappointed. Extrapolating 110 year historic average returns going forward is extremely dangerous. First, you won’t live 110 years from the time you start saving to achieve those results, and starting valuation levels are critical to your expected returns. Brett does an excellent job discussing this issue.
“Money managers point to historical data going back to the 1920s to show that in the past stocks have produced total returns of about 10% a year over the long term and bonds, about 5%—meaning a standard “balanced” portfolio of 60% stocks and 40% bonds would earn just over 8% a year. (Naturally, their legal departments quickly add that the past is no guide to the future.)
Are these forecasts realistic? Are they sensible? Are they even based on actual logic or a correct reading of the past data?
A close look at the data reveals a number of disturbing errors and logical flaws. There is a serious danger that investors are deluding themselves and that returns from here on may prove far more disappointing than many hope or believe.
This has happened before. Money invested in a balanced fund of stocks and bonds at certain points in the past—such as in the late 1930s, or during the 1960s and 1970s—ended up losing money for many years, after accounting for inflation.
Far from making an annual profit, investors went backward in real, purchasing-power terms. And those losses were even before deducting costs or taxes.”
2) Lessons From The Bull Market by Jason Zweig, Joe Light and Liam Pleven
