6/28/2013 6:15 PM ET|
History says stick with stocks
Over the past 87 years, big-company stocks have earned investors an annualized 10%.
When I look at my "Practical Investing" portfolio, I see a handful of great picks: counterintuitive bargains that were later discovered by Wall Street. Of course, I hold a few dogs, too. But the biggest reason my portfolio soared 29% in 19 months is that I had the good fortune to put a bunch of cash into the stock market at the right time.
In October 2011, when I made the first investments for this portfolio, I was uncharacteristically flush with cash. I had just sold my home of 20 years and reaped the reward that many a conservative spender gains on the sale of real estate: a huge return of capital.
A home can be an effective savings plan, at least for those of us who pay a little extra toward the mortgage each month and rarely borrow from the growing equity. The house also gained in value, by some 60% (exclusive of remodeling projects). But that works out to an appreciation rate that roughly tracks the rate of inflation.
Still, if you pour a few thousand dollars a month into even a slow-growing investment (and this is not that difficult when you can live in the investment), it's amazing how rapidly your nest egg expands. Invest $2,000 monthly and earn just 3% and you'll have nearly $660,000 in 20 years. Admittedly, a good portion of your mortgage payment goes to pay interest. But the leverage works for you, too, because the home's appreciation is based on the total value, not just your equity. Thus, if your home's value rises as much as the after-tax cost of the loan, you end up ahead.
That can be a compelling opportunity later in life, when you no longer need a big house with a kid-friendly yard. Better yet, it's a tax-favored opportunity because Uncle Sam lets you exclude up to $250,000 of the gain per person ($500,000 per couple) from tax. But I digress.
So there I was with a fistful of cash in October 2011. Predictably, I put some of the money into a new home. But at a time when many investors were scared of stocks , I was eager to pour money into the market. Why? For the same reason that I pulled money out of U.S. stocks in 1999: I expected a so-called reversion to the mean.
Simply put, in the 87 years that Morningstar's Ibbotson unit has tracked market history, big-company stocks have returned just under 10% annualized. In any given year, the market rarely clocks in at precisely 10%. But over longer stretches -- typically a decade or two -- an annualized 10% is roughly the average (or "mean") return you should expect from the stock market.
But in the two-decade period that ended in 1999, the market returned nearly twice the long-term average -- 17.9% annualized. Simple math told me that after two decades of earning nearly twice the market's historical return, bad times were coming. And, of course, they did.
The lost decade
Fast-forward to late 2011. At that point, the market's return over the previous ten years was a piddling 1.4% annualized. That was one of the lowest ten-year records ever and suggested that we could be in for a period of unusually good returns.
That has been true so far, and I remain optimistic, not just because the trailing ten-year returns remain relatively low. Many great companies still sell at reasonable price-earnings ratios relative to their growth potential, and they are awash in cash. That cash gives businesses the wherewithal to retool and hire quickly when the economy picks up steam, which should spur rising earnings and stock prices.
Of course, nothing is certain -- in life or in the market. But in my view, you don't have to be a genius to earn solid returns in today's market. You just need to be invested.
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IMO, we are in the midst of a significant transition with regards to the way wealth is defined and measured. In the recent past, we measured wealth by the value, or alleged value, of all your assets, minus your liabilities. In the future, wealth will be measured by the amount of cash-flow your assets can consistently generate. Gains and losses are only realized when you sell something. Numbers written on a piece of paper are meaningless, until you trade that piece of paper for something of actual value.
History says hold on to your but, we've had 47 recessions since 1776, 13 major economic break downs and we survived every one, coming out stronger, but no wiser. That's a recession about every five years, unless we have real Bank reform, this is what we can expect in our future.
1797 real estate bust
1807 trade war depression
1815-1821 real estate bubble, war debt, depression
1857 inflation, run on banks, panic, about 5,000 banks failed
1873 railroad boom and bust, 18,000 businesses failed, 500 banks failed, 14% un-employment for two years.
1893 bank panic, 500 banks closed, 15,000 businesses fail, 10% un-employment for 5 years.
1907 boom & bust economy, stocks crashed.
1920-21 depression, war debt, deflation.
1929 over speculation, stocks crashed, 11 years 8 months, un-employment near 25%, production dropped 50%, 9,000 banks failed.
1973-75 stagflation, 9% un-employment, end of post war boom.
1980 OPEC doubled oil prices creating massive inflation and over tightening money supply.
2008 Banks over leveraged, housing market boom and bust, millions of bad loans.
There's nothing new under the sun, just new people to fool.
If ANYONE thinks that politics isn't interfering with the economy, they're living on another planet
Giving one or any politician credit for stocks that rose from generational lows
is like giving a serial killer credit that some people are still alive.
Sometimes things happen in spite of narcissist talking head buffoons inserting themselves into
and complicating economic activity.
Wouldn't it be great if people could someday figure this out?
" History says stick with stocks "
I'm sure the Romans thought something similar.
People earning nothing out of making nothing yet having so much purchasing power of tangible goods.
It seems a drug dealer selling drugs on the corner would be considered to be making a more honest living.
Wow-and you write for a financial magazine? First of all, annualized really doesn't mean squat. Financial people love to use this number, but it's completely irrelevant. Take $10 and do the math of the +/- over the last few years (or 20 years or 50 years) and you'll see your 'real' take is nothing close to 10%. Simply start with $10 then add or subtract the % gain or loss for that year. It barely beats inflation. Just because the people on Wall Street say it's true, doesn't make it true. Keep in mind, they're making money from you giving them your money - they're not making it in the market. They just want you to keep sending them money. Annualized returns may give you comparative numbers, but they're far from the truth. It's amazing how many people have never actually done the math for themselves to see what the real rate of return is.
I've done a lot better with my active trading money, unfortunately for me, it's still an amount I can afford to lose.
I'm paying my nest egg back after paying cash for a new car in January, so I set up $50 automatic monthly purchases in no-purchase-fee DRIP's of Exxon, General Mills, Cracker Barrel Old Country Stores, Duke Realty, and Abbott Labs. I buy a new car every 10-16 and in ten years the $30,000 that goes into those stocks if I don't increase the purchase amount, plus their gains, will more than pay for my next car if inflation is reasonable.
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Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
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