That’s the return investors should now expect from the stock market over the next decade… according to Warren Buffett’s favorite valuation measure: total stock market capitalization relative to GDP.
Chart via John Hussman, Review.org
The chart above shows the correlation between this valuation measure (blue line) and subsequent 10-year year returns (red line) and it’s pretty damn tight. I think the only possible argument one can make against “less than zero” returns over the next decade is something along the lines of, ‘companies are much more profitable now than they have ever been. For this reason, investors will be willing to pay higher valuations in the future so this correlation will break down.’ In other words, ‘its different this time.’ To those of us who have been around the block these are the four most dangerous words in the investment game. (See my thoughts on profit margins here.)
If investors are guaranteed to achieve nothing over the next ten years why would anyone in their right mind put money into the stock market right now? Or even keep a significant chunk invested right now? I keep asking myself this question because it just doesn’t make any sense to me.
I think there are two reasons. First, individual investors are deathly afraid to miss out on future profits EVEN if they understand that those profits are almost sure to be given back (and maybe they get off on the roller coaster ride). They just can’t stand to see their friends make money, even temporarily, and leave them behind. Second, professional investors are deathly afraid of underperforming because it may mean they get fired – even if they absolutely believe that the risk of owning stocks far outweighs the potential reward. They would rather lose money along with everyone else than forgo profits on their own.
It’s just very, very hard to put rational analysis above our natural “herding” instincts. In fact, for most people it’s nearly impossible which is why markets will never be efficient and we will always have booms and busts.
There’s only one reason I can think of for investors to keep money invested right now and to keep putting new money to work in stocks: you’ve got a time frame longer than 10 years AND you don’t have the time or wherewithal to pay attention to even the most basic investment merits of stocks as an asset class. In this case, dollar cost average into an index fund and put more into it every single month, without fail. Over 10, 20, 30 years you should do very well – the longer your time frame, the better.
Those who have a time frame less than 10 years or who can understand and pay attention to the investment merits of stocks as an asset class, however, have no excuse. There’s just no good reason to have undue exposure to stocks right now that I can think of.
Ultimately, the stock market right now is flying as high as Robert Downey, Jr.’s character in the movie that shares a title with this blog post. And now that the Fed is taking away its heroin (QE) it’s inevitably going to go through some painful withdrawals. And even if it doesn’t, you’d do better to put your money under the mattress.