We’ve Pulled Even With the Market

Great news! Thanks to FactSet’s (FDS) big day yesterday, our Buy List has pulled even with the S&P 500 for the year. Woo! It took the market and me nearly six months to lose a little less than 1%.
OK, I can see that you’re not terribly impressed. But let’s take a step back and look at what we can expect of the stock market (and by extension, me).
Although the market likes to jump around a lot, if you look at it from a long-term perspective, the market is far more consistent than many people realize. Over the last 80 years, stocks have averaged 10.36% a year. Oh sure, stocks will plunge 50% or more even few decades, but that just comes with the territory. But if you plan to stick it out, the market is the place to be. On average, it doubles your money every seven years. That’s better than every other asset class. All of them.
But I have to caution you: Over the last 25 years, us stock investors have been spoiled. The reason has to do with bonds. Think of it this way. The stock and bond markets are in a never-ending battle for your money. Whatever bonds do, stocks are very likely to mimic.
Stocks and bonds don’t have a perfect relationship but they will tell you a lot. One of the things you may have noticed from my site is that I don’t worry too much about the “background noise” of Wall Street. This includes most economic reports, the national debt or almost anything about the Federal Reserve. My feeling is that as long as the bond market isn’t worried, then there’s no reason to be worried. The bond market is one of the few sources that isn’t afraid to tell you the truth.
Since 1981, we’ve had a massive rally for bonds. Interest rates for long-term bonds have fallen to levels we haven’t seen in decades. And like clockwork, stocks soared. The period from 1982 to 2000 was one of the greatest bull markets in history. What’s interesting is that during that time, stocks and bonds still closely tracked each other. In fact, since 1969, stocks have beaten long-term government bonds by just 1.69% a year. That’s a pretty measly bonus you get for taking on the risk of owning stocks. Moreover, that 1.69% has been fairly consistent.
If we assume that 1.69% premium will continue, with today’s 30-year bond yield of nearly 5.2%, that translates to a long-term stock market return of (let’s call it) 7% a year. So a return for six months should only average about 3.5%.
I’m afraid that too many investors think that the 20%+ years of the 1990’s are the norm. They’re not.

Posted by on June 21st, 2006 at 10:00 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.