I think it is misleading for Glassman to compare a balanced portfolio of stocks (S&P 500) against a single, low-return bond category (treasuries) instead of a balanced bond portfolio -- other bond categories have much higher average rates of return (e.g., a study by the same group Glassman gets his figures from showed convertible bonds producing annual rates of return of 8.3%, intermediate corporate bonds 7.26% and the S&P 500 10.5%). Stocks still outperform, but not by nearly as much if a balanced bond portfolio is compared against the S&P.
The more macro problem I have with Glassman is that he assumes the period 1926-2001 will be a good benchmark for future performance. I guess it might be, but I am enough of a pessimist to think that the period where the US went from being one of several more-or-less equal powers to the undisputed economic megapower of the world probably yielded better performance than we will see in the 21st century, where other nations and their companies are likely to catch up some.
Glassman writes: "On Aug. 13, 1982, the Dow closed at 777. Even today, after the second-worst bear market of the
post-World War II era, it has risen 11-fold without counting dividends. "
There are several things to be noted here:
First, Glassman was careful to choose the most favorable time period he could find to show how the Dow has shot up. He does not mention that the Dow had closed a bit above 1,000 early in 1973 -- so on his baseline date of 8/13/82 it was a little more than 25 percent below where it had stood -- nine years earlier. The Dow didn't get back to its old 1973 high until 1983 or 1984. In fact, his baseline comes just before the market started climbing, after being stagnant for more than a decade.
Timing is important when you look at comparisons. In this case, the time involved from when 777 was FIRST reached to where the Dow is now is actually about 10 years more than he indicates, back to sometime in 1970. It's a 32-year stretch to today , not 20.
Also, he assumes that the Dow's level today is at or near the bottom. Who knows, really? If the 1973-74 bear market is repeated, certainly not a given but entirely possible, the Dow still has nearly 3,000 points down to go.
Glassman also neglects to talk about time periods as a real-life factor for individuals who don't live forever. . If someone had bought stocks in 1970, at about 770, the Dow would have gone up to 2000 in 1989. A rise of 160 percent isn't bad, but that would have been over 19 years, and the climb wouldn't have beaten inflation by much. An investment in a single family house would have done much better.
If a person bought in 1970 planning to retire, his portfolio (based on the Dow) would have been dead even in 1982, 12 years later. It would have doubled around 1987, after 17 years. As noted above, it would have been up 160 percent in '89, as momentum began building toward the once-a-generation bubble of the late 90s. Of course, a person around age 65 when it started would then be 84 years old.
This last frenzy was indeed a once-a-generation phenomenon. Market bubbles took place in the late 1920s, the early 1970s and the late 1990s. There might have been another one in the 1950s, but the boom after World War II was unusually solid because of pent-up demand from the war, low levels of debt through most of the boom, a technology revolution and millions of GIs learning new skills through the GI Bill. Notably, price earnings ratios stayed reasonable in that period and people still looked at the fundamentals of a company before buying its stock.
Of course, Glassman et al are right that the market will hit 36,000 -- and a cup of coffee will cost $50 at some point. There's an old story from Wall Street, about a guy who discovers cryogenics and has a wonderful idea. He puts everything he has into a portfolio of solid stocks, leaves it with a broker with instructions to sell and pay the proceeds to anyone who supplies a secret code number, and then has himself frozen. Decades later, he is thawed, wakes up, goes to the brokerage office and gives the secret number. They had him a cashier's check for $20 million. Excited, he goes around the corner to a bar and orders a Martini. When the check comes, it's for $10,000.
posted on 08/01/2002 9:10:19 AM PDT
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