Why Buy and Hold Won’t Work (13:23)
A long term look at the performance of the US stock market and some more “sun is shining and birds are singing” upbeat weekend viewing from me – not.
The stock market has achieved 9.8% pa growth for 28 years …
From 1979 to 2007 the S&P500 index achieved 9.8% compound growth per annum. We’ve been in the middle of this tremendous bull market for so long we’ve come to think of this kind of performance as “normal”.
To see if this performance can be sustained we need to understand what drove these incredible returns in the first place.
The components of that 9.8% pa growth were as follows:
- 1.1% – Population growth
- 2.0% – Productivity growth
- 3.9% – Inflation & pricing power
- 2.4% – Lower interest rates
- 0.6% – Lower corporate tax rates
As you can see, some of the contributing factors were once-in-a-lifetime shifts. For example, interest rates declining from the high teens in the 1970′s to almost zero in the 2000′s. And corporate tax rates coming down to historic lows too.
… But that same performance is unlikely going forward
Going forward, many of the components identified above will not be as generous – and some will reverse and hold back stock market performance.
If you made the following assumptions about the contribution of each component:
- 0.6% – Population growth
- 1.0% – Productivity growth
- 2.0% – Inflation & pricing power
- -0.6% – Higher interest rates
- -0.2% – Higher corporate tax rates
… Then the forecast stock market performance would only be 2.8% compound growth per annum. A far cry from the 9.8% of old and putting pension funds (for one) under severe pressure going forward.
And the evidence for slowing growth mounts with this excellent presentation by Chris Martenson in November 2011, talking about Why The Next 20 Years Will Be Marked By The Collapse Of The Exponential Function.
Maybe there’s a huge future bonus I’ve missed – if there is, I for one can’t see it. Don’t get me wrong, I’ll be glad if there is but in the meantime I’ll plan for what I see.
