From Wm Bernstein, 4 Pillars:
"... expect at least one, perhaps two, very severe bear markets during your investing career." (p. 25)
"[I]t is an easy thing to ... convince yourself that you will be able to stay the course through the tough times. But actually doing it is an entirely different affair." (p. 28)
"Since World War II, real long-term stock returns in the U.S. have been about 8% (after dividends and inflation are taken into account), dwarfing bond performance. But world financial history cautions us not to expect the generous rewards of U.S. stocks in the future." (p. 32)
"...one of the central points of asset allocation. Unless you are absolutely certain of your risk tolerance, you should probably err on the low side in your exposure to stocks." (p. 116)
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Warren Buffet's 2/28/05 report to shareholders, p. 3 (bold emphasis supplied). http://www.berkshirehathaway.com/2004ar/2004ar.pdf
"If you examine the 35 years since the 1960s ended, you will find that
an investor's return, including dividends, from owning the S&P has
averaged 11.2% annually (well above what we expect future returns to
be)."
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A couple of key points in an article written by Elroy Dimson, Paul Marsh, Mike Staunton (London Business School - Institute of Finance and Accounting), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=476981 (You can
download the entire article by selecting the "Go to Doc Delivery"
button in the upper left of the screen.)
1. Generally, returns from equities will not be as high in the future as they were in the past.
2. In analyzing the past history of actual returns, the sample size of non-overlapping 20-year periods 1919 to 2002 is too small for statistical precision; there is much room for potential error.
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From Robert J. Shiller's Irrational Exuberance (2d ed. 2005):
"Stocks can go down, and stay down for many years. They can be overpriced and underperform for long periods of time.*** Stocks have not always outperformed other investments over decades-long intervals, and there is certainly no reason to think they must in the future." p. 202.
"...if we take the experience of other countries as relevant to our own, we might expect a much poorer performance of the [U.S.] stock market in the future." p. 198.
"The evidence that stocks will always outperform bonds over long time intervals simply does not exist. Moreover, even if history supported this view, we should recognize (and at some level most people must recognize) that the future will not necessarily be like the past." p. 198 ("always" emphasized in original).
"...studies of mutual fund performance have found that although there has been some tendency for mutual funds that have done well to continue to do so, the tendency is weak and short-lived." p. 200.
"...the U.S. stock market fell 44.1% in real terms from October 1972 to October 1974...." p. 133.
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From Bernstein, http://www.efficientfrontier.com/BOOK/chapter2.htm">Bernstein:
"Individual investors are inevitably drawn into stocks during powerful bull markets; the spectacle of one’s friends and neighbors achieving quick and effortless wealth awakens the powerful forces of human nature. Those sucked into the market for the first time during such enthusiasms invariably lack a proper appreciation of the risks associated with high returns; they draw comfort from the blandishments of experts that they can "keep close to the exits" and sell their stock the moment the bear growls. After they have suffered the inevitable losses, they are overcome by an even more powerful element of human financial nature; the urge to psychologically distance themselves from their "failure" and thus sell at a great loss, usually when prices are the lowest. The plain fact of the matter is that no investor, no matter how skilled, ever avoids bone crushing losses at times even when undertaking the most prudent market risks."
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Siegel's 2005 book, The Future for Investors, discusses the growth trap, in which expectations have already bid up the price, so your holdings will do only OK if they perform as expected, and, if for any reason they don't perform up to expectations, you'll risk a significant hit.
Eg, at p. 14:
"The growth trap holds for countries as well. The fastest growing country over the last decade has rewarded investors with the worst returns. China, the economic powerhouse of the 1990s, has painfully disappointed investors with its overpriced shares and falling stock prices."
At pp. 228-30:
"The conventional wisdom that investors should buy stocks in the fastest growing countries is wrong for the same reason that buying the fastest growing firms is wrong. China was indisputably the world's fastest-growing country, but investors in China realized horrible returns because of the overvaluation of Chinese shares. *** [T]he prospect of growth often creates too much excitement and results in overpricing, especially in newly emerging economies."
Also, e.g., p. 246:
"The evidence is strong against overweighting firms that are based solely in fast-growing countries, as these countries are especially vulnerable to the growth trap."
[Does the "growth trap" apply to equities generally?]
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Best of luck to us all,
Steve
