This is the continuation of a 10 part blog series entitled, “10 MACRO HEADWINDS IN THE FACE OF INVESTORS.”
First hand personal experience has a way of influencing our perceptions, beliefs and biases. Sometimes we need to experience something ourselves for the lesson to register and change our behaviors. Our mothers might tell us, “Don’t touch that hot stove!” but the lesson only takes root once we actually touch the hot stove. Past history or statistics of other children burning their hands on hot stoves really doesn’t do much for a younger child. In similar sense, past history or statistics of equity markets don’t really register until the investor experiences something first hand themselves.
Equity markets have done quite well over the past 30 years or since the early 1980’s. The 18 year period from 1982 through the year 2000 was particularly quite profitable for equity investors. And during these last 30 years, we have been told, taught, nudged, programmed into assuming that stocks earn about a 10% return (on average). And since the trend was quite linear during that 18 year period, it reinforced our sense or perception of “average.”
Now it is true that over very long periods of time, say the last 100 years, that equities do “on average” earn 10% annual returns. But what many investors don’t realize is that it comes in spurts and phases depending on longer term trends or secular markets. So the old maxim may be true that, “stocks go up in the long run,” we must also balance that out with another reality in life which is, “in the long run, you are a dead!”
Most investors don’t really begin investing seriously until they are well into their 30’s and 40’s. As we discussed above, we are just coming off an impressive 30 year run in equities. Any investors that are now 50, 60, or 70 years old can easily be told that “equities average double digit returns annually” because they lived that period first hand. Their personal experience backs up their perceptions.
Back on October 14, I wrote a blog post entitled, “You Guess Which Weeks?” It was a little game I put together to show clients the real nature of long term markets. I listed the following 10 weeks and asked them to select which weeks the Dow traded at a range of 11,000;
· May 3, 1999
· November 15, 1999
· April 3, 2000
· May 21, 2001
· February 13, 2006
· July 3, 2006
· July 7, 2008
· April 12, 2010
· October 4, 2010
· October 3, 2011
The answer, much to the surprise of those I can get to play the game, is “all of them.” The Dow traded at a level of 11,000 in all of those weeks from May 1999 through October of this year. That is a 12 ½ year period. How old were you 12 ½ years ago? I was 29 ½ years old!!!
Many investors might believe that this is some sort of fluke or all time record. Or is it? Here are a few more examples;
On 12/31/1964 the Dow closed the year at 874.12.
On 12/31/1981 the Dow closed the year at 875.
That was a 17 year period where the Dow went…(everybody who can add shout it out…)…well, it didn’t go anywhere on the index alone.
On 10/1/1928 the Dow was at 240.44
On 1/2/1951 the Dow was at 240.96
That was a 23 year period where the Dow went…(everybody who can add shout it out…)
Now this is no reason to panic or get depressed or quit investing. I just want to point out that markets don’t move in a nice long term linear fashion where we get double digit returns year in and year out. It just doesn’t work that way. Further, that didn’t mean that nobody built wealth or increased their financial security during past secular markets. That’s just not true.
Hence the value of owning different types of investments that has an opportunity to generate a combination of interest, dividends and capital gains. Investments in REITs, master limited partnerships, stocks, bonds, metals, commodities, cash, and alternatives can allow an investor to obtain a total rate of return that is positive in nature over long periods of time even if we don’t get any growth on a particular index for an extended period of time.
Economies and markets tend to move in bigger phases. These phases are called secular markets and are often dictated by demographics, leverage, innovations or any host of factors that impact humanity.
By nature, most of us weren’t alive during the last secular bear markets and we don’t study history. So we don’t include it in a set of possibility outcomes. Rather, we tend to grasp towards things that we were told and that were reinforced based on our own personal experiences.
Markets are unpredictable. We don’t know what we don’t know about our future. We have never gone through a sovereign debt mess quite like this in the last 100 years of equity markets. Further, todays markets are much different than markets were 40, 60 or 80 years ago with global banks, derivatives, and massive sovereign debt in the most developed economies.
Only time will tell if we are in a secular bear market that may be longer or shorter than past secular bear markets. We know that we haven’t made any real progress since 1999. However, there are plenty of people that have built tremendous wealth and improved their financial security since 1999. Are you one of them?
Wealth building happens when we execute on the four pillars;
· Make a strong income
· Live below your means
· Save your money and invest prudently over long periods of time
· Reduce and eliminate your debt
Your personal behaviors have more to do with wealth building than what any particular index does over the next few years.