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Chuck Jaffe
April 6, 2011, 5:34 p.m. EDT
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"¹ Previous Column
For fund investors, timing is everything
First Take "º
Heritage Foundation disavows its rosy jobs outlook
By Chuck Jaffe, MarketWatch
BOSTON (MarketWatch) "” I get excited every year when the "Ibbotson SBBI Classic Yearbook" arrives in the mail. SBBI stands for "stocks, bonds, bills and inflation," and the book now covers market results for 84 years, 1926 through 2010.
It's impossible for an investor to look at the Ibbotson yearbook and not confirm the value of being in the market for the long haul, ignoring the short-term noise.
The Federal Reserve will put off raising interest rates until next year, Jeff Given, a bond fund manager at John Hancock, tells MarketWatch's Deborah Levine.
That's a hard position to take, because the 2000s were one of the two worst decades over the period studied, the other being the 1930s "” the heart of the Great Depression.
"When you are measuring things over 85 years, you don't get too much impact out of one 10-year period, even a really bad one," said Roger Ibbotson, the guy behind the long-running performance study, "and people need to realize that they are investing for a lifetime. That's not, for most people, going to be 85 years of being invested, but it's going to be long enough that the market forces will win out.
"People need to step back, calm down and look at the market from a longer-term perspective," he added. "Psychologically, that's very difficult to do. People do panic, or run into one bad year or one bad market cycle and over-react; people get comfortable with the idea of long-term investing until the next bad event happens, when they panic again. But if they don't panic, the market rewards them for their patience."
Any buy-and-hold investor will get a shot of confidence just from skimming the yearbook.
If you invested $1 in large-cap stocks at the end of 1925, according to the yearbook, you'd have $2,982.24 at the end of 2010, for an annualized average return of just under 10%. A buck invested into small-cap stocks would have grown exponentially larger, to $16,054.70, or annualized returns of 12% spread over eight-plus decades.
Returns on bonds over the 85-year period ran in the 5.4% to 5.9% range "” depending on duration and whether the paper was corporate or government "” meaning that $1 turned into no more than $93. Treasury bill yields averaged 3.6% over the study time.
And it all happened against an inflation backdrop of 3%, annualized.
Had you looked at the numbers a decade ago "” before one of the two worst decades Ibbotson has studied "” large-cap stocks were still bringing down a 10% annualized return, and small-cap stocks were slightly above 12%.
In other words, the terrible decade didn't do much to derail the long-term success an investor experienced.
That's not necessarily a big surprise when you consider just how long the time period is, but it should give people some confidence to stay invested if they know that their retirement time horizon is two or three decades away.
That said, history is not always a prologue to the future, and Ibbotson has been saying as much for more than half a decade now. While Ibbotson's research is what got the public thinking that 10% was the magic number to expect from the stock market "” which was a bit of a fallacy because the number did not include any transaction costs "” Ibbotson started saying after the first downturn of the 2000s that the next quarter-century would deliver 7% to 8% for stocks.
He holds to that projection today.
That does not mean that investors should be forsaking stocks because next-generation returns will be below historic norms.
In fact, Ibbotson noted that stock returns are likely to be more attractive relative to bonds over that period. Breaking down the long time frame to the last two or three decades, Ibbotson noted that investors were served about as well by bonds as they were by investing in stocks; that was particularly true over the painful last decade.
That three-decade period, however, started at a time when bond yields were at record highs; even as rates fell, investors who held the high-rate paper got paid off for their bond holdings.
Now, yields are at historic lows. That picture makes it "almost inevitable that stocks will outperform bonds over the next two decades," Ibbotson said.
"One thing we don't have now is inflation, and that was one of the big boosters we had building into the historical returns. And you have to add the higher historical interest rates to that. "¦ So while the expected return on stocks will not be as high as we've seen historically, it will still present a nice premium above inflation and above bond returns."
While inflation could certainly return to that 3% average level, until it does, most investors will find that the lower-than-historical returns they get from the stock market "feel like" the norm, in terms of what they do to boost a consumer's purchasing power over time.
"The results of the market show what most people are living," Ibbotson said. "At any given time, they might be unhappy with what they see happening in the market, and they may be wondering how this affects them, but if they let the short-term events pass and they look at their statements over time, they can come away pretty pleased with what the market has done for them."
Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers.
Chuck Jaffe is a senior columnist for MarketWatch. Through syndication in newspapers, his "Your Funds" column is the most widely read feature on mutual fund investing in America. He also writes a general-interest personal finance column and the Stupid Investment of the Week column. Chuck does two weekly podcasts for MarketWatch, and frequently makes guest appearances on television, and on radio shows across the country. He is the author of three personal-finance books. His latest, "Getting Started in Hiring Financial Advisors," was published in the spring of 2010 by John Wiley & Sons.
The Heritage Foundation now says that it made a big mistake when it published a rosy forecast in support of Paul Ryan's budget cuts, writes Rex Nutting.
6:59 p.m. April 6, 2011
"Buy-and-hold investing will never die http://on.mktw.net/eGTuZT" 4:59 p.m. EDT, April 6, 2011 from MKTWJaffe
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