Your portfolio is going nowhere

A new study estimates the future return for a diversified group of stocks, bonds and cash at just 2% a year. Excluding inflation, it will likely lose money.

By MSN Money Partner Mar 25, 2014 1:58PM
Image: Broken-Pencil (© Christian Zachariasen/Jupiterimages)By Henry Blodget, Business Insider

I've written frequently about my concern about today's stock prices.

I believe stocks are now so expensive that they will likely deliver crappy performance over the next decade. I also believe that there is a decent chance of a 40 percent to 50 percent crash in the next couple of years.

This view is based almost entirely on valuation: According to most historically valid and cyclically adjusted pricing measures, stocks are at least 50 percent overvalued, and I don't think it will end up being "different this time." I described the facts underlying this view in detail here.

I have also said that despite this concern about stock prices, I am not selling my stocks (not yet, anyway). One reason I'm not selling is that valuation is almost useless as a timing indicator: Stocks could go a lot higher before they drop, especially if the Fed keeps frantically pumping money into Wall Street. Another reason I am not selling is that no other major asset classes are attractively priced either, so there's nothing else I want to buy.

Cash yields nothing and bonds yield almost nothing, and the latter contain significant embedded risk from inflation.

So the investment opportunities for financial assets these days are just plain lousy. How lousy?

According to data and projections compiled by one analyst, John Hussman of the Hussman Funds*, projected financial performance for a diversified portfolio of stocks, government bonds, corporate bonds, and cash is the lowest it has ever been, at least since 1948.

How low is that?

About 2 percent a year.

That's right. The prices of stocks, bonds, and cash are so high today that a diversified portfolio of them is priced to return only 2 percent a year for the next 10 years.

That's including inflation, by the way. After inflation, the portfolio is likely to lose money.

The blue line in the chart below is the projected 10-year return for this blended portfolio. The red line is the actual 10-year return from each point (the red line ends 10 years ago, obviously).

Credit: Business Insider

For those who are counting on returns of, say, 10 percent a year to pad their retirement accounts over the next decade, that's bad news.

Here's the good news, though. If I'm right about the likelihood of a significant drop in stock prices over the next couple of years, you'll have the opportunity to move cash into the market at much lower prices. And those lower prices will give you a much greater likelihood of earning a decent long-term return. In the meantime, keep your long-term return expectations in check . . . 

* Yes, I know. John Hussman of the Hussman Funds has had lousy performance in recent years. As a result, everyone now thinks he's an idiot. Don't think that. John Hussman's recent performance does not undermine his valuation analysis. Unless it's "different this time" -- unless a century of valuation measures that have always been predictive in the past have suddenly been rendered worthless -- John Hussman will be right in the end. And if you're just so convinced that Hussman is an idiot that you can't listen to a word he says, then listen to Jeremy Grantham instead. He's saying the same thing: "The next bust will be unlike any other.")

More from Business Insider

Mar 25, 2014 3:25PM
Ah yes, the same Henry Blodget of Merrill Lynch and dotcom fame who was barred from the securities industry for life.  This was the guy who was recommending that Merrill clients buy stocks that he was simultaneously telling insiders (via emails later discovered) were "junk" and "crap."  The ultimate pump and dump.  That's who you want to take advice from.
Mar 25, 2014 3:45PM
Blodget is the same person who wrote about the dot com era, he's a famous pumper and dumper.  Don't believe anything he has to say
Mar 25, 2014 3:04PM
Obama: "Our biggest fear is a nuclear bomb going off in NYC." 

America: "Our biggest threat is NYC and Wall Street. Maybe we should nuke it and progress from there."
Mar 26, 2014 9:18AM

And the winner is....??

Over time, it seems to be the Stock Market..

Timing the Markets is somewhat futile...

Buy and Hold is not dead; But trading occasionally isn't either...

Buy low, Sell high....

Buy the Fear, Sell the Greed...

There are many ways to save and invest, pick one that works the best.

There will always be corrections and opportunities...

Have some sort of Plan, and try to follow through on it...

But also try and have a Back Up Plan...

Mar 25, 2014 6:47PM
I laugh every time I see one of these gloom and doom guys spouting off about how you can't possibly make any money in the market. Every 90 days I get another dividend deposit in my bank account  and I just laugh. Let them moan and complain all they want while the rest of us make money.
Mar 25, 2014 4:23PM
Anthony??  Anthony, is that YOU writing under a pen name??  I can spot your "chicken little" dribble and charts anywhere!
Mar 25, 2014 6:07PM

Lots of reasons investors get crappy returns:

* Getting in when the market is up (like now)

* Getting out after the market drops (like 2009)

* High fees

* Following the crowd

* Not re-investing dividends

* Selling winners too soon

* Riding losers too long

* Short-term mentality

* Listening to a broker instead of doing your own research

I've been guilty of many of the above mistakes, but now I tend to buy and hold dividend paying stocks, re-invest the dividends, and avoid high fee mutual funds and brokerage accounts.  That doesn't mean you never trade, because fundamentals change and you need to be ready to dump a loser and move on.  There are many great companies paying dividends of 3-5%, and back in 2009 you could pick them up on sale.

Mar 25, 2014 6:27PM

In traditional investing analysis the value of an asset is derived from a stream of future returns it produces, after adjusting for inflation and taxes. Therein lies the rub. The more the Fed artificially pumps up asset prices, the more your percentage returns go down. If your returns fall to zero or below for a long period of time (as the Fed now promises) then by definition your investment is worth nothing. Maybe that’s why I’m not feeling the “Wealth Effect” at all.

Dont believe any money grubbing author that uses the term "crappy performance"

Mar 25, 2014 4:27PM
The people who truly believe that the market will crash are probably planning that crash for their own gain.
Mar 25, 2014 6:15PM
Mar 26, 2014 8:27AM
So, what exactly was the point of this article? I take from this that the markets rise in value and then, subsequently, drop in value over the course of time. Is this what MSN is paying these people to write? I'd really enjoy reading some articles about investment opportunities, new markets, innovative start up companies or anything else besides some article about the most common sense nugget of wisdom regarding the stock markets.
Mar 25, 2014 3:35PM
Both the stock market and housing mkts will crash within 4yrs. Over lay the Schiller curve on the market graph on of 1929-1936. Boomers need to be very careful. Own your house, car and get those kids out and working to pay off their massive college loans before it hits in 4yrs.
Mar 26, 2014 7:13AM
Your portfolio isn't going anywhere because the currency keeps diluting and there is NO economy. We have no choice but to crash, eliminate the game token money and require only enterprises be publicly-traded, not "platforms". 
Mar 26, 2014 7:13AM

"NEW YORK - U.S. stocks ended higher on Tuesday, rebounding from a two-day decline as the hard-hit biotechnology sector regained its momentum and a strong read on consumer confidence increased optimism about the economy."

Everyone knows that stocks rebounded today because of TWO Federal Reserve infusions bailing the dead carcass out. The stock markets are completely DEAD.

Mar 25, 2014 5:02PM
I agree that prices are way to high to buy. Any valuation that continues to occur will be based on speculation of a recovering economy and consumer confidence, not based on value. I hope the correction happens soon so the pain of a dramatic market drop is lessened. right now it is best to keep your allocations that were purchased more than 12 months ago and to not buy anymore. Selling is what you do if you are speculating. Ownership of shares is what you want, and that can only happen if you get more bang for your buck when prices drop to more reasonable levels.
most of people's gains in their 401K plans is their contributions that accounts for 75 percent of the increases
Mar 25, 2014 4:10PM
Retirement is not to far off for me, but not in the here.  I will be living outside the US so my money will go further.  
Mar 25, 2014 3:59PM
end stage capitalism is painful isn't it?
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