Monday, April 21, 2014

lousy returns ahead

The unsettling market plunges of two weeks ago have stopped, at least for now, and stock prices have recovered a bit. So now everyone's getting cautiously bullish again.

Everyone except me. I still think stocks are poised to have a decade or more of lousy returns. Why?

Three simple reasons:
  • Stocks are very expensive 
  • Corporate profit margins are at record highs
  • The Fed is now tightening
To be clear, I don't know what stocks are going to do next. They could go higher from today's already high prices, the way they did from similar levels in the late 1990s. They could crash, the way they did in 2000, 2007, and many other periods in which prices were almost this high. They could stay flat for years, the way they did in the late 1960s and '70s. All I know is that unless "it's different this time" -- the four most expensive words in the English language -- stocks are priced to return only about 2.5 percent per year for the next decade, a far cry from the 10 percent per year long-term average.

I own lots of stocks, though, and I'm not selling them. Why not? Many reasons, including:

  • I have a diversified portfolio of stocks, bonds, cash, real estate, which will cushion the blow of a crash
  • I am psychologically comfortable with the possibility of a 40 percent-to-50 percent market crash, and I know exactly what I will do if we get one (buy stocks). If you aren't comfortable with the possibility of a crash of this magnitude, you should either get comfortable with it or reduce your stockholdings. Otherwise, you might panic and sell after a crash, which is the worst thing you can do.
-- Henry Blodget

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