The financial world is a complex and dangerous place for those who don’t know what they are looking at. Some valuable historical perspective is offered in this segment.
Clarity Financial Chief Financial Strategist Lance Roberts reviews the history of stock valuations, the CAPE, and how what happened in the early ’90’s is relevant to investors of the twenty-teens. Here is a direct video clip.
Paid to help sell complex risk products and/or collect fees on them, most finance workers and experts have little reason to acknowledge real-life return facts. And buyers who rely on the industry’s glossy charts and jargon are dupes indeed. The mathematical truths are these:
- While the US stock market has been the best performing in the world since inception, a buy and hold equity portfolio has only produced positive compound real returns over five short periods since 1900, being 1926-1929 (before crashing 84%), 1960-1968 (before crashing over 50%), 1990-2000 (before crashing over 50%), and 2016 to present (before ?).
- For all other holding periods–the vast majority of the time–investors were waiting to try and make back their principle. Most gave up repeatedly, cashing out near lows, and locking in permanent losses.
- Even if owners did not blink as their savings tanked in bear markets but continued holding, the total annual return, adjusted for inflation, over the last 18.5 has been 1.46% a year– with all the central bank intervention and financial ‘rescues’–and even unrealistically assuming that every single dividend was reinvested, no income withdrawn, and no fees ever paid.
- On a risk-adjusted basis-which takes into account the negative skew and volatility that stockholders endured to pick up that measly 1.46% annualized nickel in front of steamrollers, guaranteed deposits and government treasuries have handsomely out-performed equity products.
- Moreover, they are priced to do so for the foreseeable future as well, since corporate securities (stocks and credit) are once more valued for steep losses from current levels.
- So, yes, as Lance points out in the clip above, one can resist facts, and stay in stocks at record valuations for fear of missing out, but the bets aren’t rational and the return prospects are grim. So, what’s the point of this ‘investing’ thing again?
- Staying out of heinously-valued markets in favor of more secure deposits, while preparing buy lists so that we can capitalize on equities when others are selling in panic and return prospects favorable? That’s an investment plan worth executing.
- It’s in our best interests to vary exposure to market cycles depending on risk and reward prospects and our own lifeline. The most critical part of the exercise is to avoid assets that are priced for return-free risk. If we fail at that, we fail miserably.
- I have explained the disappointment that Warren Buffett has become several times in the past 20 years, for a recap see: Why Buffett won’t warn that stocks are in a bubble.
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