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.
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).
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.")
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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...
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.
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.
"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.
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