Disclaimer: this blog is my personal opinion only. Information presented are accurate to the best of my knowledge. This blog does not provide any personal financial advice, or solication to buy/sell securities or financial services. I do not take any responsibility for any actions you take as a result of reading this blog.
Ok, since I do get ask a lot of finance related questions and I do like to read these stuff, I thought it would be a good idea to try to do a blog on topics in this area. This way I can hopefully educate some people about finance, clear up misconceptions of which there are many in this field, explain some of the common things you hear and what they actually mean, and answer a few questions along the way as well.
I do tend to output massive amount of information and write a lot of stuff, so I will try to do my best to keep each post short (less than 1000 words, except for this first one) and interesting. Hopefully I will improve my write style as I go along. You are welcome to post feedback and suggestions to me either on the blog or via email.
Now one thing to be clear, whatever I write is my own personal opinion. Nothing here is intended as professional advice, or solicitation for buy or selling securities, or as personal financial advice of any kind. Nor do I guarantee that my understanding and explanations are always correct, though I try my best. Lastly, don’t expect to get rich reading this blog! This is not a stock picking newsletter. I take no responsibility as a result of anything you do after reading this blog.
Ok, got all the preamble and disclaimer out of the way, let’s move on to the first blog post!
We have probably all read/heard the 4 points below, usually in marketing materials and from TV commentators. They are almost to be accepted as investing axioms:
- Stocks have returned 10% per year on average.
- US or CAD stocks have never lost money over any 10 year period, so invest for long term and ignore the short term fluctuations. It’s time in the market not timing the market.
- You must invest in stocks for growth so you will have enough money for retirement.
- Stocks return is always higher than bond returns over the long term and investing long term will smooth out the volatility in equity.
So let’s examine point 1 and 2 in turn in this post while point 3 and 4 will be analyzed in the next post.
Point 1 – Stock have returned 10% per year on average. This really depends on your starting point and the stock market index chosen. Usually it is the S&P500 Total Return Index that’s chosen for US stock market and TSX 300 Total Return Index for Canadian stock market. The starting point chosen for this claim is either right after WW2 or 1980 when the stock market level was really low. Following WW2, the western economies have been in a general growth trend with the baby boomer generation driving and increasing the size of the economy. Along the way we had large bouts of inflations and a couple recessions. In general however the economy has grown from population increase due to baby boomers generation, generation X, Y & Z, and scientific progress. The other common starting point of 1980 just happens to be the start of a great 20 year stock market bull run that ended around 1999/2000 with the bursting of the technology bubble.
However if you picked 1999/2000 as your starting point then the stats would look very different. Instead of 10% per year you would be look at about a -1% return in US$ for the S&P500 Total Return Index (source: Andex chart 2009 US Edition), and about 4% return in CAD$ for TSX 300 Total Return Index (source: Andex chart 2009 CAD Edition). Quite different from the 10% per year return that people were expecting and probably counting on from the stock market! If you were a Canadian investor who invested in S&P 500, your return in Canadian $ would be even worst at about -4% per year (source: Andex chart 2009 US Edition)!
As the mutual fund/investing industry is fond of saying: past performance is no guarantee for future performance. This warning applies extremely well to this situation, just because stock markets has returned 10% per year on average for the last 40 years doesn’t mean it will continue to do so! As the years 2000 to 2009 has now shown, the stock market return has fallen far short of what’s advertised.
Point 2 – Stock market has never lost money over a 10 year period so invest for the long term and ignore the short term fluctuations.
Well this is really nice for the mutual fund companies because they want you to keep your $$ with them so they can charge one of the highest MER in the world year after year. But as has just been shown, if you had invested in the S&P for the last decade, you lost money! So much for the guarantee that investing long term means you wouldn’t lose money in the market.
For an even worse example, take a look at the Japanese stock market. If you invested in Japanese equities back in late 80s/early 90s, you probably have lost money for 2 decades straight! That’s right; Japan’s Lost Decade is now officially running 20 years and shows no sign of stopping! Everyone who bought into the Nikkei when it was at its high of 40000 lost a lot of money! Even buying when the index is at 30000, or even 20000 would still probably cost you money!
The current US and Canadian stock market valuation of greater than 20 P/E ratios is generally associated with market tops, not market bottoms! There has been several research shown that when P/E are as high as 20, the return for the next decade is generally very low, between 0% to 5% (will do a more detailed post on this later).
So in summary for this post, don’t believe the marketing slogan! As well don’t assume the past well be repeated in the future. The only constant in the market is the cycle of fear to greed and back to fear that drives the market down to unbelievable lows and great values and then swing back up into unbelievable highs via greed and the back to another low as greed gives way to fear and the cycle repeats again.
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