“ONE OF THE BEDROCKS OF modern investing has been the surety that stocks outperform bonds over long periods. Stocks' risk premium, or excess return over bonds, has become gospel for financial advisers, brokers and pension consultants, among others.
A new research paper, however, urges investors to beware of that assumption, because stocks can trail bonds for very long stretches, as was the case in the market rout that began in October 2007.”
No fooling…It would have been nice for them to have printed something about how risky equities can be when the market was topping in late 2007. But they were writing stories about how great stocks were and how you could get rich holding real estate.
Stories like this are why I put the blog together. You need to know what to own and when to own it. You can’t get that by picking up a paper every Saturday. You need to put in effort each and every day and have a methodology and a strategy for how/when to make money and how/when to protect money.
The Vanguard S&P 500 Index Fund
Do you remember how easy it was to make money in this thing from 1994 - 2000?
I ran a hypothetical to illustrate how poorly stocks have performed over the last 10 years.
Assumptions –You invested $10,000 into the Vanguard fund on 2/28/1999
You reinvested all interest and dividends
You paid taxes on the interest and dividends each year
Your $10,000 was worth $6,996 on 2/28/2009
That is an annual return of -4.08%
You paid several hundred dollars in taxes
I ran this report, because I was doing the cost basis information for a client who was selling some mutual funds that he had held for 10 or 12 years and I was amazed to discover that he lost money. That is after he paid a ton of money in taxes on the gains each year. And we sold these funds in March 2008 and May 2008!
Very simply put – there are times to own risky assets and times to horde cash. I know when to be buying and when to be selling. I am obsessed with studying the markets.
Taking past performance and extrapolating it into future rates of return is dangerous. Here is the 100-year Dow Jones Chart from "The Big Picture".
We are in one of the red zone and may be there for another decade. So you had better know how to manage money or get somebody who does.
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