I’ve posted Entry #38 to my weekly Beyond Buy-and-Hold column at the Out of Your Rut site. It’s called What Should You Invest in If You Are Afraid to Invest in Stocks?
Juicy Excerpt: Say that it takes three years for the next crash to take place and that that crash will bring stock prices down 65 percent from where they are today, down to the P/E10 level of 8 that has applied at the bottom of every major bear market we have seen in U.S. history. Do you know what the most likely 10-year annualized return is for an index fund purchase when the P/E10 value is 8? 15 percent real.
I am not saying that you will likely get a 15 percent return on your money one time. I am saying that you will likely get an average return of 15 percent every year for 10 years running. Your retirement account is going to grow by big bunches in a short amount of time. You want to be there for that number.
You won’t be there if you keep most of your money in stocks at today’s prices. If you experience the 65 percent crash in a personal way, you are likely going to swear off stocks forever. That’s what happened to most of those who followed Buy-and-Hold strategies in earlier bear markets. You want to protect your money in some super-safe asset class paying 2 percent real until stocks again offer a decent long-term return and then move the money into stocks.
If you earn 2 percent real for three years and then 15 percent real for seven years, is your 10-year return 2 percent real? It is not. It is not quite 15 percent real. But it is a number a good bit closer to 15 percent real than it is to 2 percent real.