The Future and the Past
Securities and Exchange Commission Rule 156 requires financial institutions to advise investors to not be idiots. Hence, the disclosure pages of nearly every financial instrument in the U.S. are embedded with the following admission or variant thereof:
“Past Performance Is Not Indicative of Future Results”
“Buy and hold”… “The market goes always up”… “No-one can time the market”… “Buy the dip” “With what? You said not to sell anything”… “Simple, mortgage the farm…” The image above shows roughly what happens right after everybody feels the warm & fuzzies due to the fact that the market has been going up without a hitch for quite some time. Once the conviction that it can only rise further is widespread and firmly embedded in investor psyches (who cares about valuations?), this is often what the next scene looks like… [PT]
The instruction is futile. Most investors are idiots, including many of the pros. What’s more, suspiciously absent from all disclosures is “how” to not be an idiot. Perhaps this is because such guidance would discourage many unwitting investors from getting mixed up with the stock market in the first place.
Without question, if you don’t know what you are looking at, the past can be an abysmal predictor of future investment returns. One year the S&P 500 is up 10 percent. Another year it is up 20 percent. Then, to the surprise of practically every Wall Street analyst, the S&P 500 crashes 50 percent.
Still, practically everyone projects future returns based on past performance. For example, your retirement advisor at Edward Jones will be quick to point out that the average annual return of the S&P 500 over the last 60 years is about 8 percent. He’ll then show you a colorful chart that calculates precisely how much you must save and invest each month to retire a millionaire.
The phony precision, however, is double flush drivel. Eight percent may be the long term average annual return of the S&P 500. But averages are deceiving. And 8 percent is hardly a factor you should blindly count on.
Lettuce see… what was the long-term return of the Nikkei since 1989? Imagine having invested in the Japanese stock market at the end of 1989, when it looked utterly invincible and the keiretsu system was widely held to guarantee that stocks would never decline… it is now 30 years later, and it is still around 45% below its 1989 peak, in nominal terms to boot! Obviously, the Nikkei is a far better investment proposition today than it was then, but we can assure you that it was widely hated at its lows in 2009 – 2012. We penned a timely update in 2012 as luck would have it, pointing out that the Japanese market offered a low-risk opportunity (see Reconsidering Japan, Part 1 and Part 2). Alas, the buy & holders of the late 1980s are still waiting to break even… [PT]
Attaining or exceeding the average takes luck and/or critical contemplation of the past. Without either …read more
Source:: Acting Man