Vitaliy Katesenelson reckons that equity markets will stay range-bound for another decade or so. What does an era of very modest returns signify for passive investors?
- How confident are you in your stock-picking skills? A range-bound market still follows the logic that investors, on average, will earn average returns less expenses. If stocks barely keep up with inflation, I think it is far less risky for average investors to simply save more than trying to beat the markets. Dividend investors will be pleased to hear that an average of 90% of total returns in past range-bound markets came from dividends.
- The time horizon of most investors is far longer than 13 or so years. If your retirement is more than two decades away, the best time to gather assets is when they are reasonably priced. Even someone who is 55 and a decade away from traditional retirement has an investment time horizon that could be as long as 30 years.
- Unlike bull markets, stocks’ dominance over bonds and cash in range-bound markets is marginal at best. Diversification in cash and bonds will allow you to generate excess returns by taking advantage of volatility in equity markets.
- In an era of modest returns, it is even more important to pay attention to costs and taxes. If your stock-picking skills are marginally better than average (barely beating the markets), active investing may not be a game worth playing.
Bookmark: del.icio.us Digg StumbleUpon
12 responses so far ↓
1 Kirby // Oct 16, 2007 at 4:02 am
Hi Canadian Capitalist,
Do you think it is a good idea to get a financial rep?
Thanks,
Kirby
2 Phil S // Oct 16, 2007 at 7:30 am
Point #2 is so true. My siblings and I had been discussing that very issue because my parents are in their 80’s and my grandmother on my father’s side is still alive and fast approaching 110 yrs of age. So, we are all concerned about outliving our retirement savings. If the traditional age of retirement is at 65 yrs, then we’re still looking at potentially 40 yrs in retirement!
The average life expectancy of a Canadian is about 72 yrs and if we’re only talking about 7 yrs in retirement, then I think I may already have enough money in my RRSP. It’s a whole different ballgame if we’re looking at 40 yrs in retirement, of course. I would have to more than quadruple my RSP if I were to survive that long on my savings.
3 moneygardener // Oct 16, 2007 at 10:43 am
In my opinion the concept of a range bound market just reinforces the power of dividends, and companies that grow dividends consistently. Even if high dividend growers share price becomes range bound you will receive an ever increasing dividend, and have further opportunitied to accumulate at higher yields.
4 Canadian Capitalist // Oct 16, 2007 at 10:56 am
Kirby: I am working on a series of posts on advisors that I hope will help answer your question.
Phil: The trouble with life expectancy is that it’s an average. If you are 40, there’s a 50% chance that you will live to 85 (not 72). If you are married and your spouse is also 40, there is a 50% chance that one of you will live another 51 years! You can play around with different scenarios available on this website:
Link
5 FourPillars // Oct 16, 2007 at 11:10 am
I have to admit that I don’t believe anyone can predict the future when it comes to economics so as interesting as this book might be - I’ll be ignoring the conclusions.
Mike
6 Canadian Capitalist // Oct 16, 2007 at 12:14 pm
Mike: The surprising fact is that long-term performance of equities can be predicted, at least vaguely.
For instance, Vitaliy’s position is not that far from John Bogle’s, who estimates future equity returns based on:
initial dividend yield + earnings growth + change in p/e
Bogle doesn’t take a position on change in p/e and figures it will be the same 16 or 17 it is today and hence figures a 10-year returns in the 7% range. Vitaliy figures p/e will be lower in the future, based on past history. And to be fair, Vitaliy does note that he could be wrong but doubts it.
7 Canadian Capitalist // Oct 16, 2007 at 12:17 pm
Oh and the same goes for bond returns. Total 10-year bond returns have a 90% correlation with current yield. So, over the next 10 years bonds are likely to yield 4% returns.
8 moneygardener // Oct 16, 2007 at 2:45 pm
I have to agree with 4P.
Future Earnings growth = Who knows? Could be 4% per year, could be 12% per year….nobody could really give an argument to support knowing this with any certainty.
Future Change in P/E = who knows (far too many factors go into this)
9 Canadian Capitalist // Oct 16, 2007 at 5:44 pm
MG: Future change in p/e = who knows is right? It may be an educated guess, but it is a guess, nonetheless.
Earnings growth however is fairly stable. Over the past 5 decades, it has been 5.5%, 9.9%, 4.4%, 7.4% and 5.7%, so a 5%-6% guess isn’t likely to be wildly off. Compare earnings growth to p/e changes (Bogle calls it speculative return) over the same time period: -1%, -7.5%, 7.7%, 7.2% and -8%.
10 Mike // Oct 17, 2007 at 8:09 am
In a range bound market, if things just go up and down without a steady incline, then likewise the indexes will stay bound as well. If thats the case, does this suggest that mutual fund indexes/ETF’s are not the right way to go in this type of market? I would hope that good managers of mutual funds would realize this and start positioning their portfolio (dividends/bonds/cash).
11 Millionaireby45 // Jun 11, 2008 at 12:38 pm
There is a great clip on BNN today describing the differences between Passive and Active Investments. Both sides make very valid points and it comes down to the specific individual to decide what they are more comfortable with. Worth checking out.
12 Charles // Jul 18, 2008 at 4:17 pm
So this comment comes pretty late in the game but I stumbled onto another quote from this book and came to this blog entry.
Regarding the wisdom of passive investing in such a market, I would imagine that it just magnifies the importance of allocating to indices that are as uncorrelated as possible, and rebalancing regularly. If it’s unlikely that any one market will reach its multi-year high/low at the same time as any other, then won’t a passive investor will get better returns than any of the individual markets?
Leave a Comment