>if you had put your money in the Dow in the late sixties, even by 1983 you would still be at a loss.
That's not quite right, the Dow doesn't include dividends or reinvestment of dividends. In order to calculate the rate of return, you should add in the dividends; and the price appreciation and dividends generated on shares purchased using these dividends. If you did, I believe the return would be over 5% per year over the period you mentioned (1969 to 1983). And this is for the unlikely event of a one time lump sum investment. A more likely scenario is a stream of savings and investments for most investors. For example, $2000 invested per year. Then the return for those years jump substantially.For more on this, see some of the analysis at the Motley Fool site fool.com as well as any number of books on long term market returns including the classic "Random Walk Down Wall Street" by Burton Malkiel.
But your point is still valid. There could be a long period where the market return is low.
The question now is whether the market is too high. In my opinion, not yet. The current forward PE of 16-17 times next year's earnings is in line with LT interest rates of 6.5%. We have inherently a far less risky world than we have seen so far this century, so the risk premium stocks get over bonds should narrow.
But most people say they have bought into the long term buy and hold strategy, and are plowing money into the market at a record rate. The 401k accounts and IRAs are channeling huge amounts into the market . There are hordes of salesman selling things like variable deferred annuities or life insurance where the payments are channeled into the stock market. There are sound reasons for these accounts to exist and for people to do this. Manias often starts with a fundamentally sound investment theme. But I believe that this huge flow of funds will drive financial assets prices much higher over the next several years. Stocks will be priced at a parity or a premium to bonds.
When the projected return on stocks is less than bonds or real estate (the other major investment vehicles for individuals), people's behaviors will change and we will get a lengthy period of down or consolidating market. I live in California and have just experienced a cyclical period just like this in real estate.
Thanks for starting this thread. I have been analyzing BHE and 13 competitors and should finish sometime this weekend. I will post a summary of my analysis. Also I have been investing in closed end funds for some time, and I will share some of my analysis there later.
Paul |
