For decades, stock market investing has been promoted to all Americans as a way to increase personal wealth and fund retirement.  A huge industry has been created around this enterprise, one that has made some investors wealthy and many Wall Street veterans even wealthier.

To be sure, the stock market provides one of the best ways available for individuals to increase wealth over the long run.  Therein lies the rub, the long run can be very long indeed.  Yes, the stock market has averaged annual gains around 10%, plus or minus depending on what time frame is observed.  There is no reason to assume that this will change when decades is the time frame being observed – decades, plural.

Take a look at any long term S&P 500 chart and you will see an overall trend of up and to the right, but you will also see lengthy periods of sideways.  For example, the S&P 500 in December of 1965 was at 92.43.  In July of 1982 it was at 107.09.  That’s a gain of 14.66 or 15.86%, but spread over 17.5 years!  A simple bank savings account would have yielded more.  In fact, inflation during this time hit levels close to 20%!  In terms of purchasing power, the stock market would have been a disastrous place to be.

To put a finer point on it, the stock market is not something that should be avoided, but it is also not something that should be blindly trusted.  It is easy to make strong cases for and against stock market investing based on the time period selected and the type of analysis performed.

It does seem clear however, that the idea promoted by many that stock market investing is a path to substantial increases in wealth can be extremely dangerous.  There have been periods when this is true.  The greatest bull market of all time, from 1982 to 2000, was a period when anyone looked good – stock picker, dart thrower, or index fund.  These periods are less frequent than we would like to believe.

My operating assumption is that we are now in a prolonged sideways market.  This means that the markets will be in a “trading range”, moving up and down, unable to reach new highs, unlikely to break through to new lows, and overall sideways.  There will be multiple false all clear signals, times when it looks like the markets are recovering only to fall again, bound by the trading range.

In such an environment we have a few tenants:

  • The goal shifts from wealth creation to wealth preservation for everyone, regardless of age, risk tolerance, etc.  In a range-bound market the opportunities for true wealth creation are hard to come by.
  • Focus also shifts to beating inflation.  A reasonable metric is to have returns that are equal to inflation plus 3-5%.
  • “Safe” investments like savings accounts, money markets, and CDs are still not viable options for large allocations as they will not deliver returns that outpace inflation.
  • Portfolios should become overweight “boring” lower-return asset classes that deliver income and provide some opportunity for appreciation of principal: certain fixed income securities and dividend paying equities.

One response to “Philosophy

  1. Mr. Durable,
    I like it! I will read more and perhaps send a few comments. Good Info.

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