More on “The Lost Decade”
There was quite a bit of commentary on yesterday’s Wall Street Journal article on The Lost Decade for stocks.
Our view is that readers of this article should give it a careful and critical look, examining the evidence and the conclusions. We think that many investors will uncritically accept the basic premise, choosing some other asset class at exactly the wrong time — an expensive decision.
Partly because we feel so strongly about the article, we had a special interest in the reaction of others. All of the sources below are people that we respect and read regularly. None of them seem to share our basic concern with the work . We believe that it was an opinion piece presented as objective research, something that characterizes much of the current mainstream media. [Thanks to Abnormal Returns for making sure we did not miss anything good!]
David Merkel does not find this evidence as a good reason either to increase or decrease stock allocations, although he sees more difficulties ahead.
Tim, at The Price of Everything, has similar concerns about current risk.
Gaius Marius cites some other blog commentary, and concludes, "the likely course of aggregate stock prices is significantly lower in real terms."
Bill Rempel has a strong statistical analysis that is well worth reading. Please check out his own interpretation of the results, but one key statement is the following:
The best that can be said is, in the modern post-WWII era,
low-returning decades like the one just past are typically followed by
average to above-average decades. What’s to worry?
Bespoke Investment Group provides one of their typically attractive charts and concludes, "While the returns could easily get worse, periods that have been this
bad have not lasted longer than 4 years (1937-1941) before they’ve
started to get better."
We especially like the discussion from Kevin Price at The Float (now added to our list of recommended sites). He points to a 2004 story from the Financial Times (free subscription required). This story is much more balanced than the WSJ piece. One can also see how that advice from 2004 would have worked. [not so well] While he sees the potential for more multiple compression in large cap stocks, he notes that there was plenty of opportunity during the decade. He also observed the negative market effect from the CNBC commentary.
This is the closest analysis we saw to anyone who saw the impact of this story on the individual investor, perhaps because Peter’s company and ours are in touch with that clientele. Many bloggers are more attuned to professionals who are expected — rightly or wrongly — to be able to spot such issues.
The thoughtful commentary from these sources, and those we cited yesterday, could help an investor to make wise decisions. Unfortunately, the readership for these articles is much lower than for the WSJ. A recurring crucial question at "A Dash" is how much work an investor is willing to do to gain the best information.
Each Thursday we update the sector ratings and current results from our TCA-ETF model. There has been continued shifting, since money is moving rapidly among sectors. This is not ideal for any method that includes trend as a component.
Most investors and traders have difficulty with trend-following models in gyrating and declining markets. It is frustrating to switch around, often taking losses. Those experienced in such methods understand that the point is to be on the right side of big moves. There have been some changes since this list was generated (always delayed by a day or so). Interested readers can get a complete report on the overall system performance from an interesting and unique test.