… your $200,000 ten years ago has been halved in terms of purchasing power. However, in terms of planning purposes, your anticipated retirement amount has been reduced by 75%. Given these outcomes, who will be able to retire? And for those already retired, how many will “unretire?”
For Buy and Hold investors, better have a look at the following post. There are lessons to be learned, even if your broker would prefer you not know them. When viewing the charts below, remember that Japan has completed two lost decades with no end yet in sight. We are just finishing our first decade, but the results have been devastating for investors, retirees and those planning for retirement.
To put things into perspective, suppose you were nearing retirement in 2000 and had $200,000 invested in the stock market. Your anticipated retirement date was 2010 and you expected your investment to compound forward at 8% per year. Doing the math, you expected to have $426,000 at retirement. Instead you would have ended up with $138,000. To make matters worse, inflation over this period meant that your purchasing power in 2000 dollars was even less.
The government-issued CPI index shows purchasing power decreased by about 22% over this period. Thus, your starting $200,000 in purchasing now compares with about $108,00. (The CPI index is felt by many to understate actual inflation. John Williams at Shadowstats.com argues your purchasing power decreased quite a bit more.)
Using the government’s CPI numbers, your $200,000 ten years ago has been halved in terms of purchasing power. However, in terms of planning purposes, your anticipated retirement amount has been reduced by 75%. Given these outcomes, who will be able to retire? And for those already retired, how many will “unretire?”
If inflation heats up, as many expect, the impact on retirement will be even more severe.
November 25, 2009
As we enter a new decade we are compelled to point out what, in our opinion, is the “Lost Decade” of the United States. The financial media, brokerage houses and advisors have done a good job promoting the opportunity of owning US Equities, and as a result the average investor continues to wait and hope that their cookie cutter, simplistic investment strategies will provide for their future.
The reality is that investors have been severely punished for “buying” and “holding” US equities over the past decade. The following chart illustrates the “nominal” performance of the Dow Jones from January 2000 to October 2009.
The next chart illustrates the Dow Jones performance when it is adjusted for the government’s measure of inflation, the questionable Consumer Price Index (CPI).
The next chart illustrates the performance of the Dow Jones when it is compared to a more stable measuring stick; gold.
To the average investor this insight should be devastating to say the least. In the world of investing, ten years should be considered “long term” and investors should not be okay with this kind of performance.
Conventional thought suggests that an investor can expect an 8% annual return from the broad stock market over the “long term”. The following chart compares this expectation versus the reality.
Contrary to historical evidence many professionals have insisted that the market always rises at 8% per year over the “long term”. Unfortunately this past decade was a tough learning experience for many investors as capital fled the stock market and entered the hard asset market.
The point of this article is not to win an argument about Gold being a better investment than Stocks. We do not favor one asset class over another asset class. Instead we are trying to illustrate that markets are cyclical and not linear. No market goes straight up or straight down. There are times that it makes sense to invest more heavily in the general stock market and there are times that it makes sense to invest more heavily in hard assets. Unfortunately the average investor has been led to believe that one investing strategy could be used regardless of market conditions.
From 2000 – 2010 the place to invest has been hard assets and during this time it was wise to limit exposure to the general stock market.
These long term market trends tend to last a very long time and we expect this trend to continue into the next decade. However, no market goes straight up or straight down. We expect that there will be times that the US Stock market and even the US dollar will outperform gold and other commodities. We expect that many investors will foolishly cash in their stocks and then buy into a frenzied hard asset market only to be disappointed when they once again miss the trend change. Ultimately, we expect a parabolic, mega spike in precious metals that rivals the 2000 Nasdaq mania. However, it is our opinion that this market mega blow off will happen many years down a very bumpy road.
Going into 2010 we caution long time, hardened stock investors not to wait another decade to decide that commodities are a wise investment. At the same time we caution long time, hardened commodities investors not to expect a straight up, one direction bull market. Both of these investment views are likely a recipe for disappointment.
At investmentscore.com we use proprietary long term charts that help us identify long term market trends. We then consult our weekly and daily charts to help us identify lower risk entry and exit points. We try to avoid the distorting affects of floating currencies by comparing markets directly to one another. To learn more and to sign up for our free newsletter please visit us at www.investmentscore.com. We recognize the challenges of the coming decade but at the same time we are excited about the opportunities that will be presented.