I’ve posted Entry #365 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stocks Have Been Performing Poorly For a Long Time But Most of Us Haven’t Noticed.
Juicy Excerpt: From January 1, 2000, through December 31, 2016, the annualized real return on stocks was 2.25 percent. That’s not good. That’s poor performance. 17 years of it.
Investors who don’t adjust their expectations of stock performance to reflect valuations were expecting annual returns of something in the neighborhood of 6.5 percent real during that 17-year time-period. The fact that real-world returns came up so far short of expectations means that those millions of people have less to spend on cars than they would have had their expectations been more realistic. And less to spend on clothing. And less to spend on eating out. And on everything else. Our entire economy takes a big hit when stocks produce such underwhelming results for such an extended period of time.
We all save less too, of course. Most of us think of our paychecks as the source of our savings. But the reality is that a large percentage of our savings is the return we obtain on money we saved from earlier paychecks and invested in stocks. The compounding returns phenomenon really is the eighth wonder of the world for middle-class people seeking a decent retirement. When stock returns dry up, annual additions to accumulated wealth slow down dramatically for most of us. When stocks perform poorly for 17 years running, we all fall behind on our efforts to achieve our most important long-term financial goals.