The problem with these post hoc analyses is that they are biased, in that they consider only index performance. Index products were not available until the early 70s. However, someone who had bought and held a blue-chip DJIA stock in 1909 (such as Standard Rope & Twine or Central Leather) would have likely lost most of the investment by mid-century. Likewise, someone who had invested in a 1960s blue-chip such as Xerox would have fared poorly compared with riskless assets.
Also, the performance was not stated in real terms. There are many 20-year periods in which the inflation-adjusted returns on equities were negative. Further, no comparison was made to the return on risk-free assets. For example, if money were invested in the S&P 500 in 1966, it would have underperformed a money market investment until 1985. And if one had been in cash during 1966-1974, equity cyclicals in 1974-1981, and 30-year treasury zeros from 1981-1985, one would have trounced equity performance in 1966-1985.
I'm certain that you are aware that these data can be represented in such a way as to paint a rather dismal picture for long-term equity performance. So, I have to question the motives of someone who would claim that "in the long run, stocks always go up". In fact, the only equity-based investment that appears to always go up is a constantly rejiggered index. And passive indexing, though much in vogue today, has its own vulnerabilities. Just as the indexes have provided an illusion of market strength for the last two years, they will provide an illusion of market weakness long after most stocks have bottomed.
It is my view that the bear market just now gaining public notice will permanently drive many "investors" from the market. Those who survive will realize that the market overvaluation was worsened by the prevalence of indexing, and will temper their enthusiasm for index products. |
