What Does The Next Decade Have In Store For Investors?

The following post is from Neal of WealthPilgrim.com. After reading the article, be sure to sign up for free at Wealth Pilgrim to receive more from Neal.

This question is especially important if you are considering retiring soon or if you have been offered an early retirement package.

If you’re like me, when you try to imagine what lies ahead, you think about your most recent experiences and extrapolate going forward.

Investors do this more than anyone – at least as far as I’ve seen. While I can see why folks do this, it’s really not a very good exercise and I’ll show you why.

If you think back over the last 10 years, you’ll agree that it hasn’t been a picnic for investors. Depending on when you calculate the 10-year average, you could get a slightly negative return or a slightly positive return for that period. But either way, it’s a lousy return.

Based on that, investors might forecast a crumby 10-year return going forward.

Even though we’ve heard that old expression that the past is no guarantee of the future when it comes to investing, what else do we have to base our decisions on other than the past?

Well…I do want you to consider the past when you think about the future.  Just think about it a little differently.

Let’s look at an example to help explain this idea.

If you review the chart below, you can see that the 10-year trailing return in 1974 was an ugly -3.8%. That means had you invested in 1965 and held on to your investments through the end of 1974, your annualized return was -3.8%.

[TABLE=2] [TABLE=3]

But what happened over the next 10-year period? The market had an annualized 6.9% return. In fact, after each of the last 5 decade-long market meltdowns, the market did pretty well.

Is that a guarantee that the next 10 years will be years of wine and roses for all?  Not by a long-shot. But it does indicate that history is on our side. It shows the importance of not falling into the trap of thinking our most recent experience is going to be repeated in the future.

Exactly one year ago, did you predict that the market would do so well by the end of the year?  I sure didn’t.

While we face real challenges ahead as a nation and as investors, it would fly in the face of all the facts to become pessimistic right now.

What do you think we’re in store for over the next 10 years?

Comments

  1. In fact, after each of the last 5 decade-long market meltdowns, the market did pretty well.

    I don’t think you’re reading this precisely right, Neal. But you are very much on the right track.

    Economic growth in the United States has been strong enough to support an annual stock return of 6.5 percent real for as far back as we have records. Leaving aside valuations, that’s what we should expect. To get an accurate read of what is going to happen over the next 10 years, you have to factor in valuations (both current-day valuations and recent-history valuations). That’s where the story gets dark indeed (but with hope for the long-term future countering the dark picture to some extent).

    Whenever Buy-and-Hold (the idea that valuations don’t matter) gets popular, we have a crash and an economic crisis. There is not a single exception in the historical record. It is not even possible for the rational human mind to imagine how there ever could be one. Once the economy is destroyed, Buy-and-Hold becomes as intensely hated as it earlier was loved and our human energies are freed to begin rebuilding the economy. The question re the next 10 years is — Where are we today re this natural and inevitable cycle?

    When the economy is destroyed, stocks usually come to be priced at about half of fair value. Things have to get that bad for people to give up their belief in Buy-and-Hold, which holds great emotional appeal during the time when this Get Rich Quick approach appears to be paying off . To get to half of fair value from today’s prices, we would need to see a drop in stock prices of 60 percent to 70 percent. So the outlook for the next five years is not even a little bit promising.

    Once we get that huge crash behind us, there are two ways that things could go. It could be that the middle-class will be so devastated that both our economic and political system will be driven off a cliff. Or it could be that responsible people will step forward and open up a national debate on what we have learned (but have thus far not been permitted to discuss publicly) over the past three decades about how stock investing really works. If we see the national debate, my bet is that we are going to seeThe Golden Age of Middle-Class Investing, the most sustained period of economic growth in our history. We have learned stuff in the past 30 years that has never been known before, stuff that can bury Buy-and-Hold so deep in the ground that it can never hurt us again.

    I see this as a race against time. We have learned so much wonderful stuff that we have not been permitted to share with each other that we have the ability to take our economy to places that it has never been before. But there is a lot of institutional pressure still in place today to keep this stuff under cover (the concern seems to be that it would “look bad” for experts to acknowledge having been wrong about Buy-and-Hold). If we do not come clean soon enough, political unrest may get so out of control that we will never see the good stuff happen.

    We’re facing a national gut check. Do we still have what it takes to set things on the right track one more time? Or we have we all grown so cynical or indifferent to the plight of those suffering the financial hardship always brought on by promotion of the Buy-and-Hold “idea” that we are okay with seeing the whole thing go down rather than say the Three Magic Words (“I” and “Was” and “Wrong”)? You can probably tell by the way I have worded things which outcome I am rooting for.

    Rob

  2. What do you think we’re in store for over the next 10 years?:
    I think 2010 will be good, but beyond that, not so much. After 2011 I’m hoping for at least flat.

    Here is why:
    The stock market is based on the growth in the economy, and I see us continually losing in the global market with the policies that we have in place, and the new ones coming down the pipe.

    While I agree with the bank bailout (TARP) to aid with the financial systemic breakdown, I don’t believe the 2nd stimulus package is a good idea. What will we do after the 2nd massive stimulus package starts to wain? A 3rd one? This is starting to look like a downward spiral to me (very scary).

    Until the government focus on the problems with the labor inequalities, I don’t see a quick or easy fix. In the long run (2011 and out) our labor problem will continue to be the stock markets Achilles heel, unless our government (both Republican and Democrates) wakes up.

    Hopefully, I’m being too gloom and doom, and it won’t pan out this way… ;)

  3. “my bet is that we are going to seeThe Golden Age of Middle-Class Investing, the most sustained period of economic growth in our history.”

    Sounds like a great opportunity to buy and hold :-)

    Honestly, I am not one to talk about investing strategy but I agree with your perspective. We have a great opportunity in front of us with a large population of Gen Y entering adulthood and an even larger population of foreign born dreaming of living in our country.

    The question is whether or not our government will get in the way or stay out.

  4. As I will definitely fully retire within the next 10 years – being 55 and semi-retired now and working mostly for the health insurance, I am in very very conservative investments. Like CD’s, government bonds, and money market.

    I definitely won’t get rich doing that, but hopefully I will NOT lose anything either… and that’s all I am really worried about – hang on to the capital :)

  5. I think one of the most serious events we will be dealing with in the next decade will be the collapse of the U.S. currency. I really wish it was not a reality and I will not try and convince anyone that it is. What I will say is that more than a few of us see the writing on the wall and are considering strategies to safeguard some wealth if it does happen. There is information out there on what can transpire around a currency collapse and if one wants to educate themselves a little on the matter, maybe one can prepare better.

  6. Great points! I recall in late 1974, mid 1982 and 1990 people were crying that the stock market was like throwing money away.
    Truth is they were great times to invest.
    I personally enjoyed reading the numbers on this post.
    Have a great 2010!

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