I recently came to understand that even the S&P is a collection of “winners”. The list continually changes as the fortunes of companies rise and fall. Of course it is a much better measure than the DOW.
Your post kind of confirms by belief that no one asset class is the “sure bet” over the long term. But popular opinion seems to be that stocks are. Some would look at the bull market in stocks and point to the influence of the invention of the 401k and IRS tax deferred gains. It reminds me of the recent “can’t miss” housing investment scam fueled not only by government encouraged low rates and lax lending standards but government encouragement via the 500K tax free gain on profits from selling your house.
Seems like the “best” investment class is a moving target.[/quote]
Yeah, the S&P’s composition does change over time, so it is a collection of “winners.” But with 500 companies and the change occurring at a pretty glacial pace, the S&P is a pretty good representation of Big Cap Corporate America.
Yeah, I’d agree that the best investment class is a moving target. If it weren’t, however, capitalism would be broken (it’s clearly in the repair shop right now).
Having denigrated buy-and-hold, I will point out one other thing. It’s not that hard from a quantitative standpoint to “time” the market over long periods of time; that is, not day-to-day or even year-to-year, but rather over long periods of time. The problem is that most folks don’t have the intestinal fortitude to stick with the program.
For example, based on fundamentals alone, anyone in their right mind – who didn’t face principal agent issues – got out of the stock market in 1997. Valuations were absurd (although they got much MORE absurd until 2000). Had such a person sold their stocks and reinvested in CDs, rolling them over each year until this past fall, they would have earned about 4% annualized pre-tax over the period. The stock market returned about 0% annualized, including dividends, over the same period with 20% more annualized volatility. (That’s 400 basis points of annualized outperformance before adjusting for volatility!!) The problem, of course, is that this same person would have looked like a total blithering idiot from 1997 to 2000 and then again from 2003 to 2007. Currently, it’s highly likely that stocks are modestly undervalued from a LONG TERM perspective. But buying now one risks looking like an idiot if the S&P declines to 500 or 600, which could easily happen. But the only thing we can count on in finance is mean reversion, and eventually this crisis will pass – although it could be several to many years – and stocks will head back to their long-term trend. Choosing to earn 2% on CDs may look smart for a while, but eventually equity returns from today’s levels will likely outperform cash and bonds by a wide margin. Eventually. The problem is that most folks can’t take the pain until Eventually arrives. Such is the encapsulated history of finance and investing.
