Read it and weep folks. When you take into account real inflation and real transaction costs, you have not gotten a positive return on stocks in the last 20 years. Keep listening to Cramer and the rest of the shills on CNBC and you’ll lose even more money over the next ten years. Stocks are not cheap. They haven’t been really cheap since 1981. If you invest in stocks today, you are a fool.
The real bear market
Commentary: When you count inflation, investors are still in the red
By Brett Arends, MarketWatch
BOSTON (MarketWatch) — Your cost of living went up about 0.2% in September, says the government. Meanwhile your U.S. stocks went down about 8%. Ouch.
Your cost of living went up 0.3% in August. The stock market lost you about 6%. Ouch, again.
Your cost of living went up 0.1% in July. U.S. stocks? They lost another 2%.
Okay, three months isn’t much to go on. But let’s look at the slightly longer term.
So far this year the stock market has lost about 3.5%, even when you include dividends. That’s not too bad, right?
At the same time the consumer price index has risen 3.5%. So in real terms the stock market has cost you about 7%. A diversified basket of U.S. stocks — I’ve used the ultra-low cost Vanguard Total Stock Market Index /quotes/zigman/191296 VTSMX +1.95% fund as a proxy — will buy you 7% fewer goods and services than it would have done at Christmas.
Economists may talk about the threat of “deflation,” or falling prices, but steady, persistent inflation remains the reality for most people. Yet too many investors overlook it when looking at their returns.
It’s not what you make that counts. It’s what you make — if anything — in “real,” inflation-adjusted dollars.
On the surface, it looks like investors in the stock market have been making some gains, albeit slowly, over the past 10 to 15 years. Investors are up 120% since the fall of 1996, they’re up 50% over the past decade, and even over the past five they’re level. But when you factor in the rising cost of living, the true picture is far worse.
In real, inflation-adjusted terms, investors in the U.S. stock market have made effectively no money, even when you include dividends, since the spring of 1998. Even if you invested 10 years ago, in the panic following 9/11, you’ve made less than 20%. Over the past five years you’re down 12%.
And I’m flattering the performance figures. In reality few people have done as well as a low-cost index fund. Most people have had to pay 1% a year or more to a money manager. They’ve had to pay taxes on dividends. They’ve blundered in and out of the market. According to the definitive study by Dalbar Inc., largely thanks to poor timing the average investor has underperformed the Standard & Poor’s 500 index by more than 5 percentage points a year over the past two decades. By that standard, most investors have actually lost ground on Wall Street, in real terms, since about 1992.
That would mean most investors are in the red at least since the 1994 publication of Jeremy Siegel’s Stocks for The Long Run.
Since the 1999 publication of James Glassman and Kevin Hassett’s prophetic masterpiece, “Dow 36,000”? Don’t ask.
I’m assuming here that the official CPI figure is an accurate measure of the cost of living, which it almost certainly is not. There’s a good chance real inflation is at least one percentage point a year higher. If that is correct, the entire last 20 years have been a sham.
Even more depressing: “Dollar-cost averaging” hasn’t helped much. Someone who has been dollar-cost averaging into an index fund every month for 15 years has made a grand total return, gross, of less than 5%. Most of your investments over the past five and 10 years are still in the red.
In inflation-adjusted terms, we’re in a bear market that’s lasted for 15 or 20 years.
Rob Arnott, the contrarian investor who runs Research Affiliates in California, notes the sloppy thinking that got so many investors — and money managers — into this mess. “Stocks are wonderful assets if you buy them when they are cheap,” he says. “But stocks are just like any other asset class. Buy them when they’re expensive and you’re going to regret it.”
Meanwhile, everywhere on Wall Street you still hear the repetition of the same old mantras and the same old canards. Most of them can be spotted by their astonishing use of the present tense, as in “stocks outperform.”
Arnott adds that stocks are usually only cheap when everyone else is too terrified to invest. The only people who’ve made money in the past 15 years are those who invested in 2001 to 2004 and during the crash of 2008-9.
Today Arnott likes emerging-market stocks, which have just tanked.
Me? I notice everyone is too terrified to buy European stocks, and the banks.
The Watchdog says:
Great post. Here’s another must-read article for today:
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/10/24_James_Turk_Report_-_Why_Gold_Will_Go_Above_$11,000.html
Personally, I’m not expecting $11K gold, since re-monetization can occur with less than 100% gold backing, but $11K is the “fair” value and Turk’s explanation is spot on. I’m in Rickard’s camp, expecting re-monetization with something like 40-50% backing which puts gold at $4-5K. However, if all confidence is lost Turk’s endgame will indeed come to pass.
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24th October 2011 at 10:08 am
Dave says:
But if I invest in oil and natural gas stocks during a time when “peak energy” is happening, that’s OK?
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24th October 2011 at 11:00 am
Administrator says:
Dave
Whatever you decide to invest in, let us know so we can do the opposite.
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24th October 2011 at 11:10 am
AWD says:
It seems nothing can stop the stock market from going higher. You know, when it keeps going up despite all that it going on economically, it’s rigged, false, fraudulent, a craps game, roulette wheel, blackjack table. A grand scam.
No matter how many “stocks” you own, each person’s share of the $15 trillion deficit is $40,000. I wonder how many people even own portfolios worth what they owe on the deficit?
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24th October 2011 at 11:34 am
Alina says:
“It seems nothing can stop the stock market from going higher”.
Nothing except the hint of no more monetary stimmulus (yes, no more QE, no more “Op twist”, no more CDO repurchases) and the smell of rampart inflation. When that happenes, the stock market will reveal its true value.
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24th October 2011 at 12:34 pm
Persnickety says:
NEVER FEAR, ALL IS WELL AGAIN! It’s morning in America!
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8844646/World-power-swings-back-to-America.html
Jim: please launch an emergency investigation into what happened to Ambrose Evans-Pritchard. This essay is so unlike anything he’s written I have to assume that he’s been disappeared.
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24th October 2011 at 1:18 pm
Muck About says:
For the foreseeable future, there is nothing to _invest_ it that is not subject to organized selling or buying in order to force whatever the trade is “into the money”. The name of the game is gambling, machine trading and manipulation by the TBTF banks and broker/traders, hedge funds and syndicates.
For the ordinary retail trader, there is one thing you can do. Speculate. Find a system that makes money at least 1 out 3 trades and you can make money at it but you have to monitor it every day, make no “at market” trades (all limit bids and sells).
If you aren’t willing or able to gamble, just stay in cash and watch it dwindle to the tune of 8-10% a year in purchasing power. Your only other choice is physical gold and silver and _forget_ about it until you need the purchasing power it represents. Then sell it coin at a time for whatever it brings and exchange it for what you want.
This is no market for old men (except me, of course).
MA
PS: Right now:
VTI: (general markets)is on short term DITHER, intermediate term LONG, long term SELL..
QQQ (NASDAQ): DITHER, SELL, SELL
XAU: (gold and silver index) SELL,SELL,SELL
SLV: (silver) ETF , SELL, SELL, SELL
IGE, MOO: ETF, SELL, DITHER,
USO (oil ETF): DITHER, SELL
TBF (20yr Treasury Short): short term DITHER, intermediate: possible BUY (not yet).
UDN (short US$): short term: weak BUY, intermediate: BUY, long term: SELL
UUP (long US$): short term:DITHER, intermediate: SELL, long term: very weak BUY
In other words, unless you like to speculate on the SHORT side, pack your reserves under the mattress and just watch for a while.
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24th October 2011 at 2:08 pm
Dave says:
“Administrator says:
Dave
Whatever you decide to invest in, let us know so we can do the opposite.”
And you do the same for me with gold?
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24th October 2011 at 2:13 pm
Administrator says:
YTD return on gold +16%
YTD return on S&P 0%
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24th October 2011 at 3:42 pm
Dave says:
I invest some of my money in oil and gas stocks for a potential profit. You invest in gold for protection(or so you say). What’s the comparison?
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24th October 2011 at 7:21 pm
Administrator says:
Dave – you dumb bastard. Just how much oil can you store in your closet, anyway? When the shit hits the fan, are you going to pull out your oil stocks and trade them for some flour and oil? Gee, I wonder what the fucking difference is.
Do me a favor and pull your head out of your ass.
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24th October 2011 at 7:31 pm