Sad stock returns survivable
by Gary Silverman, CFP®
This is the fourth in a series looking at a sad 15 years of investing.
We’ve been looking at how, over the last 15 years, average stock returns have been a dismal 2-3% (I call it “sad”). While it is rather rare for this to happen, it does happen, as we’ve been discussing.
Lessons from last week: When times are good, don’t expect them to continue; when times are bad, don’t expect them to continue. And, already noted, bad times can last 15-20 years. For many of you this revelation is enough to say “just forget stocks.” While I don’t agree with the sentiment, I completely understand it. So if not stocks, then what? And, by far, the most compelling answer is: bonds.
Let’s review what we learned about bonds from week two. While stocks averaged 2-3% over the last 15 years, bonds averaged about 4.8%, or about double the return of stocks. Let that sink in. Bonds did twice as good as stocks did over the last 15 years. (To add insult to injury there were even two stock bull markets during that time period.) And I think you’ll get little argument that bonds are less risky than stocks.
So the obvious answer is to eliminate or at least drastically reduce your stock holdings to get better returning, lower risk, bonds. Unfortunately, what is obvious in investing is often fraught with problems.
Let’s go back into my time machine to the early 1980s. My parents were able to lock in a 10-year CD rate well over 10%, and I was fortunate to get a mortgage (with good credit) for about 14%. Fast forward to today and a 10-year CD (when you can find one) locks in a rate of 2.5-2.6%, while I can buy a home and pay well under 4% now. My point? Interest rates over the last many decades have been going down. Dramatically.
Through magic (I explained it before, and it takes some time, so trust me on this), lower interest rates raises the performance of bonds, bond funds, and bond indexes. Think of lowering rates as a strong wind helping a runner get down the track.
Of course, the reverse is true. Just as a runner enjoys the wind for a while, when she makes the turn and heads around the track she’ll head right into that same wind. This is one of the reasons bonds tend to underperform inflation over short, medium, and long investment periods about half the time. Though I’m not predicting interest rates will soon reach their early ‘80s levels, they’re just about out of room to fall. Certainly over the next 15-20 years they will provide a headwind to bonds.
Here’s what I want you to take away from this four-week look at the sad 15-year investment period we just went through: There is no substitute for patience (time), diversification (having many eggs in many baskets), and the knowledge of how and why this benefits you when it comes to investing.
This article was published in the Wichita Falls Times Record News on April 24, 2016.