With stock indices continuing to set new highs, does this mean negative returns for stocks are on the horizon? If prices increasing over time was a troubling development, what would be the point of investing at all? You would think investors would realize there is no potential for future gain, and not invest. So why do investors stay invested?
Our minds interpret graphs and events up TO this point, but fail to consider that changes will still occur going forward into the future. This is a form of “end of history illusion.” I can demonstrate this feeling to you simply by showing graphs for the S&P 500 and DOW indexes …
(Click on the image to enlarge)
(Click on the image to enlarge)
Here’s a video of the Dow since 1927 – watch the downs followed by the ups.
You feel like there’s a peak and there is no way progress can be made from this point forward. That feeling is what the end of history illusion is describing: “In general, people tend to see significant changes in hindsight, but fail to predict that these changes will continue.” In truth, history does show that past end of history feelings have forgotten what market history really teaches us.
- We can’t imagine what the future of either graph will look like. But, we see that after every single peak, there is a decline! So we’re imagining a decline coming! Most declines are small, some are large – nobody knows which kind we will see.
- Notice though, that after all those peaks, there’s a new peak later. At the time of each peak, we couldn’t know there’d be a bottom, recovery and then a brand new, higher peak later.
- Money you have in the markets is not for this year, but for those future years – beyond the end of history we currently see today when looking at where the markets are today. Today’s markets are irrelevant as far as investing decisions go today, other than they are a stepping stone from today into the future. In other words, later.
- Markets and the economy need the downs (to clear out excesses and form a renewed foundation for growth) in order to get the new ups.
- The article below is describing how to invest for those later years you will have.
- Understand the end of history illusion so you can see past today – everyday. There is a later, later!
Snippets from the article below: These results indicate that new index highs have historically not been useful predictors of future returns. There is no reliable way to predict when stock returns will be positive or negative. “Is now a good time for me to be invested?” The evidence suggests that the current state of the market is not helpful in answering this question.
Indexing into a properly globally diversified portfolio means that all those holdings in that global portfolio would need to go to zero value at the same time for you to lose all your money. Arguably an unlikely event (barring asteroid or zombie apocalypses).
Moral of the story:
As the article below suggests, every single investor in the markets today expects positive returns, not losses. Otherwise, they wouldn’t invest in the first place! They’d save their money safely in banks. The interaction between buyers and sellers (Fear in the air summarized More sellers than buyers) is what we see as the end result shown in the various indexes. When prices decline sufficiently, buyers appear more willing to buy at that price because that’s when expected returns are greater (and sellers who are capitulating through fear of further loss are willing to sell).
Rather than worry about where the markets are today, relative to where they were yesterday, the point is looking at where you are in life and your long term goals (long term = the rest of your life; not this week, or this year) should define what you do. In other words, looking into the future when the money will be needed (you’ve invested it today for the future) later.
Money for this year’s expenses shouldn’t be in the stock markets at all.
Finally, today’s highs are lower relative to “tomorrow’s” highs – there’s no straight upward line between them though; markets will always go up and down, and up and down, relative to past peaks.
Note: Your email may not show the embedded part of this blog … please go to the blog to be able to read the complete post.
- In the interest of disclosure: I do use Dimensional sub-managed SA Funds with most clients (not a fund requirement, but a business standardization decision I’ve made because of the evidence based approach).
Analogies that explain the difference between investing and planning (Yes, they are different)! :
- Investing is the fuel for your plan – it is not the plan itself.
- Investing are the cables that support your bridge which is the plan that gets you where you are to where you want to get to.
This blog is not a solicitation; simply an explanation of the basic philosophy and approach.
Photo from Stocksnap.
Charts source: Google Finance.