The Biggest Myth
Amen of the Week
"Of course, my wife hates that I read for more than three hours almost every day, but it gives me a level of comfort and confidence in my business. AtMicroSolutions it gave me a huge advantage. A guy with minimal computer background could compete with far more experienced guys just because he puts in the same time to learn all he could."
- Mark Cuban, founder of MicroSolutions (and owner of the Dallas Mavericks) How to Win at the Sport of Business
The Biggest Myth
Happy 2016! Well, maybe not so happy. Stocks had a lousy 2015, and they’re starting off this year even worse. When things get bumpy like this, it’s important to know what you own and why you own it. Are you too heavy in stocks? Are you too heavy in the wrong kind of stocks? Next week we’ll host a webinar to help you answer these critical questions.
It's a big myth that stocks go up 8-10% per year.The reality is that stocks are far more volatile than that. Over the past 25 years, stocks have rarely generated returns between 8-10% in any particular 12-month period. They’ve been just as likely to fall 18% or leap 33% over the course of a year. If you own stocks, forget 8-10% per year. Stocks are volatile – they go up a lot some years; they go down a lot some years. What matters is how they perform over the very long-term.
Even the bumpy 10% average is a myth. A celebrity financial adviser last year predicted that the Dow will hit 75,000 within 15 years (up from today’s 16,900 level). The basis of his reasoning is that the market has gone up about 10% per year since 1926, so assuming that same return going forward, the Dow should hit 75k by 2030. This is dangerously flawed reasoning. For one thing, it completely ignores valuation. Stocks were much less expensive (as measured by their price relative to earnings, or P/E) in 1926 than they are today.
Price matters. If you pay too much for anything, it hurts your chances of selling it at a profit in the future. From today’s high valuation levels, stocks as a whole ("the market") have lower odds of producing a positive real return in the 5-10 years ahead. Selectivity and prudence will matter far more going forward than in the past.
Yours in the Field,
Frank Byrd, CFA
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