Not that I believe that inflation is about to rear its ugly head any time soon given the deleveraging that is still occurring in the economy, but it always helps to look at things in inflation-adjusted terms. Hence the humor from a 70s era comedian masquerading as economic pundit. As everyone becomes giddy over the recent rally in equity markets it pays to stand back and look objectively at market levels and what they mean for your retirement portfolios. The "non-practicing" financial planner cum blogger Doug Short has been doing a marvelous job of assembling such data, distilling it, and putting it into graphical form with lots of variants for all to see. I especially like his chart showing the "Four Bad Bears" (Nasdaq crash, Great Depression/Dow Jones crash, Nikkei 225 crash and the 2000-? crash in the SP500) in inflation adjusted terms. The results are quite startling, especially for a) those retiring during the last ten years and b) those having or making significant allocations to their equity portfolios during the last 10 years as they saved for retirement. Have a look:
Devastating.
You can click on the chart for a bigger image in your browser. Or, for an interactive version click here.
In real terms an equity portfolio initiated at the market top in 2000 is STILL down 50% despite the heady rally of over 45% from the March 2009 market bottom! Any wonder why people are still feeling the pain? Why consumer confidence is not returning? Why individuals are turning to fixed income annuities? Why disregard for Wall Street is so high?
A graphical lesson for those who think that investing in the markets at any level should get you average market returns "over the long run". For most, the long run isn't nearly long enough.
Excellent information! We had a couple of questions.
ReplyDelete- What are the risks of fixed income annuities.
- Is there a companion measure of "money on the sidelines?" The bulls point to the huge amounts sitting in money market funds, foreign sovereign funds, private equity and hedge funds, earning minimal return. Was this the case in those 4 bad bears?
Spouse of oracle
There is no such thing as "money on the sidelines". When I buy stocks from you, you now hold cash and I hold stocks. Prior to that you held stocks and I held cash. The only pent up buying demand is when the marginal propensity to hold one or the other asset changes. The asset more favored goes up; the asset out of favor goes down. Basic equilibrium theory.
ReplyDeleteAs to question #1, the primary danger in holding fixed rate annuities is that the return does not match the funding requirement. If a 5% return (or whatever the contract rate is) meets the future requirement, then the annuity is appropriate even if not return maximizing.Another risk is the default risk of the issuer. I could promise you 10% fixed in perpetuity but you'd have a hard time collecting after I die I 'd bet.
Mark