Author: Karl Steiner

December 2, 2022

The Other Lost Decade For Stocks

The period from 2000 to 2010 is often referred to as “the lost decade” for stocks in the U.S. Here’s a chart of the nominal total return (including reinvested dividends) of $1,000 invested in the S&P 500 at the end of 1999. The blue box shows the 10 years over which this broad market investment failed to make money.

I happened to start seriously investing in stocks at the beginning of 2000. So, this graph approximates my experience. I was starting to make some money around 2007 when it all collapsed again. I had to wait another 3 years before I could safely say I had made any money on most of my original stock investments.¹

One way to illustrate the value of reinvesting dividends is to examine only the price changes of the S&P 500 over this same period as shown in this graph.

An investor who spent their dividends along the way had to wait an additional three years to make gains on stocks.

So, Stocks Are Risky?

These graphs may give you the impression that stock investing is a risky business that only sometimes works out. However, longtime readers know that “the lost decade” was more the exception than the rule. Long losing streaks for stocks are relatively uncommon historically, and that’s why this unusual period earned a name.

October 30, 2022

Expected Return Forecasts – 2022 Edition

It’s time once again for my annual compilation of expected return forecasts for various asset classes. Every year I review long-term expected return forecasts made by various financial companies. While predicting future trends in asset class returns with any consistency is basically impossible, mindful investors need to make some reasonable assumptions of expected future returns to build a forward-looking investing plan.

I compiled 2022 forecasts from 18 financial companies based on the list I had from last year. I also again used a very helpful survey of 40 investment firms by Horizon Actuarial Services (Horizon). Their survey includes many of the companies that I independently reviewed.

This plot shows long-term annual return expectations for various asset classes from these sources. The data from Horizon represent the averages across all the firms in their survey. (Click on the image to enlarge it.)

All returns are on a nominal basis, meaning they are not adjusted for inflation. I highlighted the Horizon survey overall average with a pink line connecting their forecast dots. And as you would expect, those survey averages fall in the middle of the pack for all the asset classes. Unlike some past years, this year no one firm made the consistently highest or lowest return forecasts.

And here’s a complete downloadable table containing all the 2022 forecast data, links to each firm’s forecasts, and some additional comments and notes. (Click on the image to enlarge it.)

Click here to download an excel version of the table including the links to all the forecast sources.

As shown in the “max. period” column, most of these forecasts cover the next 10 years, but some of the forecasts cover periods between 5 to 15 years. The tan rows at the bottom of the table are all volatility (standard deviation) estimates, which I will discuss a little later in this post.

September 21, 2022

Fitting Square Inflation Data Into A Round Stock Market Narrative

It may seem like I’ve been obsessed with inflation recently. But so has everyone else, and it’s an important issue for long-term investors for reasons I’ve previously detailed. So, it’s worth noting that the Bureau of Labor Statistics (BLS) recently issued its August Consumer Price Index (CPI) inflation data.

Here’s a typical headline about the new data from the venerable New York Times:

“Price Pressures Remain Stubbornly High”.

And the fear of stubbornly high inflation caused the S&P 500 to slump 4.3% on September 14th, the day after the August inflation data came out. This headline from Yahoo! sums it up:

“Stocks Tank After Higher-Than-Expected CPI Report”.

On the surface, both of these headlines are accurate, but they miss a big part of the story. The best analogy I can think of would be a story where a fireman bravely saves several children from a roaring house fire. Yet the next day the local headline reads, “Fireman Stubs Toe During Alarm Call”. In other words, there is some good news contained in the most recent inflation numbers.

Inflation Is Falling, Not Rising

In a July post, I noted that each month’s new headline inflation number adds the most recent month’s inflation data to the prior 11 months of data to create an annual inflation number.¹ That is, the August headline inflation value of 8.3% represents the overall inflation observed from September 2021 through August 2022. But only the most recent month’s value represents anything new. We’ve known the bulk of what’s contributing to the August 8.3% inflation value for many months.

When I’m looking for recent trends in inflation data, I find it much more helpful to focus on month-by-month inflation data. Here’s a graph showing the 1-month change in inflation over the past couple of years.

The monthly data paint a different picture. The 1-month change in CPI in August of 0.1% was the lowest reading over the last 22 months, with the only exception being the most recent July number. In other words, the last two months strongly suggest that inflation is abating dramatically from June’s extremely high number of 1.3%.²

Of course, two months of data don’t constitute a long-term trend. Inflation could spike again next month; no one knows for sure. But to imply that the recent inflation numbers are adding inflation pressure is misleading. The only way that the August 12-month inflation value of 8.3% could be substantially lower was if significant deflation had occurred in August, which means that prices would have to be decreasing in multiple categories of goods and services.

So Why Are The Headlines So Bad?

The reason for the dismal inflation headlines is summed up in a brief article from CNN. Among other things, the article points out that:

“The [index] rose 0.1% from July, versus economists’ projections of a 0.1% drop.” (my emphasis added)

In other words, everyone was hoping that there would be 0.1% monthly deflation, but we got that amount of inflation instead.

However, the BLS reports its margin of error as 0.06% on these monthly changes. So, the August number could be as low as 0.04%, which becomes zero if we round to the significant digits that BLS reports. And given that the August projections were attempts at predicting the future, they likely carry with them a much higher margin of error. Based on my 35 years of experience with both projections and data analysis, I would argue that there is likely no statistical difference between the August projection and the actual result reported by BLS.

September 2, 2022

If You’ve Already Won The Investing Game, Should You Stop Playing?

Perhaps you’ve heard this saying about investing: “If you’ve won the game, stop playing.” It’s a famous quote from Bill Bernstein. Bernstein was saying that if you’ve accumulated enough wealth to safely make it through retirement, then don’t tempt fate by continuing to invest in risky assets. Think of it as the retirement version of premature sports celebrations.

It’s a sobering thought. The night after you confidently toast to your retirement success, your stocks could take an unprecedented tumble. So, why not avoid that potential nightmare and convert those risky stocks into something “safer” like government bonds or cash?

To answer this question we first need to define retirement “success”. The best way to define your own success is to prepare a well-thought-out investing plan. At a more generic level, Bernstein offers the 25x rule-of-thumb, which says that your retirement nest egg should have 25 times your annual living expenses after net annual Social Security income. The 25x rule is just the inverse of the 4% rule, which you can read more about here. Once you’ve reached the 25x threshold, you’ve won the game and can stop playing.

But Bernstein notes that successful retirement investors don’t have to stop playing the game entirely. He suggests keeping that 25x nest egg in safe assets like bonds and cash, and then betting on stocks or other risky assets with any money accumulated above that threshold. A related idea is the conventional advice to gradually glide down your portfolio from mostly stocks to mostly bonds as you approach and move through retirement. You can either do this yourself or use “Target Date Funds” that automatically perform this “glide path” function for you as shown in this graph from Morningstar.

August 17, 2022

The Real Estate Market Is Turning A Corner

To say that the real estate market has been turbulent this year is an understatement. Runaway demand for homes early in the year crashed into a wall of unprecedented interest rate hikes built by a Federal Reserve determined to control inflation. The collateral damage includes both home buyers and sellers, many of whom have traumatic war stories to tell. I have my own war story to tell in today’s post. But never fear, I’ll augment those meager anecdotes with some data and observations about the wider national real estate market.

My Real Estate War Story

In April I decided to pack up my house and move to something smaller and less maintenance intense. I chose to buy a new house first and sell my old house second because I wanted to avoid the hassle of showing a house while still living in it. It turns out that my fear of a small hassle forced me into the worst possible market timing.

The first house I unsuccessfully bid on in April had eight other offers in two days and was sold for $50,000 above the asking price. The second house I bid on quickly had four other offers, and I barely beat out the competition by offering $40,000 over what appeared to be an already bloated asking price. In both cases, my real estate agent advised me to avoid any offer contingencies, even a basic inspection.

I knew that the Fed was eager to raise interest rates, so I endured the four weeks until closing on my new house and moved within a week after that. So, a mere five weeks had passed when I put my newly painted and scrubbed old house on the market. It might as well have been a century. The seller’s fairytale market that I witnessed in April mocked me as I entered a seller’s hellscape in late May.

Instead of multiple offers in a few days, my listing had zero offers for two months. About a month into the process, I decided to reduce the asking price by $25,000. One offer finally came. It was $50,000 under the already reduced asking price. After negotiation, we agreed on a price that was $35,000 under the asking price, which I regarded as a small victory. Amazingly, I ended up selling the house for less than the recently updated County tax assessor’s appraised value!¹

My Perspective

Beyond my recent nightmare, all signs suggest that my local real estate market is turning the corner into something new and different. Realtor for-sale signs are sitting on front lawns for noticeably longer. Friends complain that rapidly increasing interest rates have put those once affordable-looking mortgage payments out of reach. And homeowners in my area are starting to see their Zillow estimates drop by a few percent.

On the supply side, new housing developments are going up all around my neighborhood. Typically, my morning walk consists of walking away from my new house for a half hour or so and then back again (a one-way distance of about 1.5 miles). Within that walk radius, I estimate no less than 150 new houses going up. And that doesn’t count the hundreds that have already gone up in the last few years. Here are a couple of photos from one of my walking routes.

A just finished home stands next to a row of homes still under construction.

A new development that will have at least 90 homes. On the horizon stand homes in a development completed just a few years ago.

In my view, local demand is slowing while supply is still accelerating, which seems like a bad combination.