Friday, November 14, 2008

Stocks Beat T-Bills Over Last 12 Years -- NOT!

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[FR:005730] EADS: Construction of Mobile, Ala facility on hold

MARK HULBERT
Irrational exuberance redux
Commentary: Stocks now lag T-bills for the trailing 12-year period
By Mark Hulbert, MarketWatch
Last update: 10:14 p.m. EST Nov. 12, 2008
Comments: 113
ANNANDALE, Va. (MarketWatch) -- It was almost exactly a dozen years ago that Yale University finance professor Robert Shiller bent Alan Greenspan's ear, prompting the Fed chairman to give his famous "irrational exuberance" speech.
Shiller and Greenspan both had to endure a lot of ridicule for what at the time seemed like an overabundance of caution, especially as the stock market continued to skyrocket for several years thereafter.
But, with the past dozen years now under our belt, Shiller's and Greenspan's concerns appear to have been remarkably well founded.
Consider two hypothetical individuals who started investing at the beginning of November 1996. The first put everything in the stock market, while the second put everything into 90-day Treasury bills.
The second investor, who has been sleeping like a baby for the last 12 years, was sporting a 3.6% annualized gain as of Wednesday night. The investor who put everything in the stock market, in contrast, was sitting on a 2.9% annualized return. (To calculate the stock market's return I used the Dow Jones Wilshire 5000 index (97199001:
Dow Jones Wilshire 5000 Composite Index
News, chart, profile, more
Last: 9,120.05+583.57+6.84%5:07pm 11/13/2008Delayed quote data
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InsiderDiscussFinancials
Sponsored by:
97199001 9,120.05, +583.57, +6.8%) and included dividends.)
In other words, the stock investor's return is 0.7 percentage points lower on an annualized basis than the return of 90-day T-Bills.
Talk about adding insult to injury. The investor who bought and held stocks has less than nothing to show for the immeasurable agony through which he has suffered over the last dozen years.
Many investors will find these numbers shocking and outrageous. What happened to stocks' much-vaunted ability to beat a money-market fund over the long term?
In fact, of course, as any old-timer will tell you, what we've experienced since late 1996 is not that unusual. The long term has to be a lot longer than 12 years in order for the probability of stocks not beating T-Bills to shrink to low levels.
Consider data compiled by Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania. In his famous book "Stocks For The Long Run," Siegel reports the percentage of time from 1802 through 2001 in which stocks failed to beat T-Bills. Not surprisingly, this percentage falls as holding period increases.
But what is perhaps even more surprising: This holding period has to grow to well more than a decade in order for the percentage to drop to below 10%.
Holding Period
% of time stocks didn't beat T-Bills
1 year
38.5%
2 years
34.7%
5 years
26.0%
10 years
19.9%
20 years
5.5%
30 years
2.9%
The message of Siegel's data is that what has happened to stocks since 1996 is something that, over the past two centuries, has happened about one out of five times.
Hardly unusual, in other words.
Those of you who are thinking about putting a lump sum in the stock market right now, take note. Assuming the future is like the past, you must be prepared to hold your stock investments for a very long time -- for 20 years -- in order for your odds of doing better than a money market fund to approach the 95% confidence level that is often use to determine that a result is statistically significant.
You might very well do better, of course. But don't let your hopes for better gains blind you to the not-insignificant probability that you will have to endure a number of years in which you are worse off than a money market fund.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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Comments: 113
The great 401K scam started in the mid-80's with the elimination of most pensions and diverting the retirement savings into the market via mutual funds. Much money was made with those funds by Wall Street over those years. Now that we are getting clo...
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tomford429 20 hours ago
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The great 401K scam started in the mid-80's with the elimination of most pensions and diverting the retirement savings into the market via mutual funds. Much money was made with those funds by Wall Street over those years. Now that we are getting close to a critical mass of 401K-based retirement plans for Boomers having to actually fund retirements (monthly deposits replaced with monthly withdrawals) the wheels suddenly fall off and we realize that we have been scammed. The result will be Boomers working until they die in a tightening job market where supply exceeds demand so dramatically that wages will decline significantly while healthcare costs continue to take whatever is left of our life savings. We have been, and continue to be, lambs to the slaugther.

Independent1 19 hours ago
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boomers thought this whole thing up. and where do you think the money goes after retirement? it gets rolled over to the same group of companies that provide 401k plans--in similar investments, usually.

Banquo 17 hours ago
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No, corporations thought this thing up--to lower costs and raise profits. Unfortunately, nobody stopped to consider what would happen if everybody did the same thing and left a population of workers and retirees unable to afford buying their products. Now they get to find out.
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illease 18 hours ago
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tomford,Although I agree and have suffered through these past 20 years or so of minimal if any market gains. America years ago had new oil and tons of growth. Now we're running out of oil and have just gone through an absurd building bubble spark by 1% Greenspan. On the other hand we have a decent lifestyle for the most part and plenty (too much) to eat and relatively clean water to drink and lots of guns to protect our families at night. Things could be worse. Obama promised free healthcare just like congress so now that'll be fixed. Try to look at both sides to maintain an even keel ... We can't all be wealthy, experienced, veteran, superb,valiant,high profile,brilliant trial lawyers like those we meet on the news over and over again nightly.
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SequoiaRedux 18 hours ago
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Depressing dude, depressing. I read that 3 times hoping to find a flaw.Unfortunately it is accurate.Gov't and the younger generation will escape all the Social Security liabilities because most will work until they die. Could be a grand gov't scheme.
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rdkovel 13 hours ago
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I am sorry to say, Tomford and all the respondents are all right. First, we have all been scammed by an explicit or implied promise of future prosperity, which was never in the cards- not everybody can be wealthy, it's impossible. Our money and labor and hope were needed (or exploited)to fuel the progress of this country. If you are old enough you remember the cartoon of the donkey with the cart operator holding a fishing pole with a carrot suspended in front of the donkey- you know that donkey is the little man. Now for the 401k's I totally agree. If you have read about the old stock traders like Livermore, then you know about the "fresh batch of suckers" that they discussed- the suckers being the victims of promised prosperity, like 401k's. As far as nobody realizing this stuff in advance, I disagree- the rich get richer by being shrewd- they prey on the lambs. Law of the jungle. Flip side- there is (at least was) good came from it, like living in a non- 3rd world environment. Please reply- I'd like all opinions.

tomford429 8 hours ago
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Do you remember that feeling just after 9/11? Not the shock and horror, but the absolute and positive love for America? That love is still there, maybe just under the surface. These crooks are ruining our county. They are a much bigger threat to our way of life than OBL and company. War on Terrorism? How about War on Scamorism? We can start with the Banking Boys and their political cronies. The problem is, the only way to get at them is for everything to fail and for us to start over. If that's what it takes then bring on the soup lines. I'm ready to rumble.
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Marsden 7 hours ago
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Living in a non-third-world environment? If you're lucky, sure. There are a lot of beautiful, comfortable places to live in the USA. However, if you really travel you will find that most of our major cities have endless squalor as well, and most of the people spread out all over the countryside are living in trailers or hovels. If that's all we have left, I'm sorry to say that it ain't much.
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oldbill 20 hours ago
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The results are somewhat cherry picked. Not considering inflation: Debt has been the worst investment since 1996 (your mortgage, car note, carried credit card and revolving charges, etc.) arbitrarily at 10% average, has cost an annualized $10,000 a year for each $100,000. That means that since 1996 you have paid $120,000 of income for each $100,000 of average debt. Cash is the second worst. For each $10,000 of average cash (checking and actual cash in the wallet and dresser drawer, you have lost about 3% annualized a year. You have paid $3,600 in lost savings interest. As to stock in index funds (most 401ks, government retirement funds, and IRAs) the results are half as bad as the article indicates because of the effects of employer matching, tax deferral, and dollar-cost-averaging. My personal results are different. My mortgage was paid in full in 1990. I have had no debt of any kind since. My Gold and Silver Eagles, all bought between 1998 and 2003, have outperformed my other investments by hundreds of percents. Since 1996, my Savings Bonds are up nearly 100%. My Stock investments are up over 100% since 1996. I have put very little into accounts related to stocks since 1995, when I retired. I don't rebalance from bonds, annuities, CD's, and money market funds to stocks. That's a fool's errand. If you have money in any of these, let it accrue. If stocks go up enough, take the original principal out and put it into the above. Never do the opposite. Unless, of course, you feel sorry for your stock broker or investment firm. They are the ones who want you to rebalance from fixed income to stocks. Why is that? Oh, fat fees and commissions, that's why.

Hooter 7 hours ago
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You have lost your a** on your "paid-for" house.Say it's worth $300,000. Thats $18,000 per year inforgone interest.Real estate taxes another $3000 a year. Maintenance another $3000.And inflation has made your savings bonds worth LESS than when you bought them.You need an investment advisor.
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KeepingThemHonest 20 hours ago
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Even for the one year term stocks outperformed T-bills 61.5% of the time.
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CommieIBanker 19 hours ago
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I have great respect for Hulbert, but his last conclusion about a lump sum in now seems overly simplistic--I suspect a Bayesian analysis (what's the 20 year return given a trailing 10 year relative return

wge 15 hours ago
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Excellent point! Anyone can cherry pick the begin and end points and come up with any result they want. Of course things will look bad after a market crash and we don't need "erudite" commentary to tell us so. This is an example of "drive-by-journalism" that adds no new data points but stirs up emotion. Now is the time to be adding new money into equities while prices are in the bargain basement and you will not "endure a number of years in which you are worse off than a money market fund". Guaranteed!

sarookha 14 hours ago
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Really? Take a look at the post 1929 decade. Folks who bought at the apparent "bottom", even several years after the crash, discovered that yet another cavernous pit awaited them. It can take a decade or more for the market to even figure out whether it is going to recover or not.
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Mkthinker 18 hours ago
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When will the nonsense end MH? Is this what is being taught in college today - that Shiller let alone Greenpawn predicted the fall of Western Civilization? Let's remember. In 1996 the market was at a fraction of what it was 4 years later. In stock trading you do not get a gold star for being Dead Wrong 4 years and take another 8 to have a politcal commentator say He Knew all Along. This wrong call missed two bull markets and would have suggested an exit that was foolish until this year. It is likely we can find a lot on this board who made better calls than that.For the naive Greenspan was and is simply a right wing partisan. He worked for Ford, he has made his preferences for that agenda no secret. In 1996 we were in the midst of an election. He switched from a market cheer leader to a woe and doom person during the election cycle. The opposite of what he did in 92 and exactly what he did again in 2000 ...he manipulated the interest rates and the press as well as he could with political objectives. Connect the Green Dots and you understand why interest rates were kept recklessly low at 1% up to the Election of 2004.Hardly seems coincidental. Do you really think he was fighting inflation in 2000? Do you doubt he was trying to take down the bull market and the optimism going into the election? Go back and see how consistent he was NOT on IE. See how often he cheered the market after 96 and took credit for all things good. If you say enough contradictory things you get it right eventually. And if you have enough prophets saying Too High Too Low, one like Shiller will get lucky. Both were wrong at the time. No reason to think today's prophets will be any more correct.

sscaler 5 hours ago



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Just curious but I believe Shiller hinted the housing market was overblown before it was a popular notion?

Independent1 5 hours ago



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he did
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SequoiaRedux 18 hours ago
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If Greenspan was so visionary with his "irrational exuberance" comment, why did he fuel the fire with his artificially low interest rates that sparked the artificial housing irrational exuberance. Maybe he's a dope that got lucky with an offhand comment.

illease 17 hours ago
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Sequoia,Let's give him the benefit of the doubt and call it Alzheimers
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Nelson24 18 hours ago
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I say invest in solid companies that pay good dividends. That will allow you to ride out the volatility. Annaly (NLY) comes to mind. Now paying 55 cents per share per quarter with indications that it will increase those dividends. (Over the past 11 quarters it has increased dividends every quarter but one, and even then it left it at .55) Even if it stays at .55 through next year I'll pick up a cool $10K regardless of the day to day gyrations of the market.

bearingdown 17 hours ago
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Here are a few more "solid" companies that pay divedends: GM, Bear Stearns, Lehman, WaMu..... They're cheap too!

Nelson24 17 hours ago
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Please don't compare the management of the losers you list with the management of NLY. I did not use "cheap" as a reason to buy NLY.I'd suggest that you research NLY before comparing them to those four losers.
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bearingdown 16 hours ago
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I did not intend to make any comparison between the comapnies I listed and NLY. My only intent was to point out how hard it can be to find a "solid" company. All of the ones I mentioned were considered very safe and solid one year ago.
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ltview 18 hours ago
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The pendulem swings both ways everyone. We overshoot at the top, we overshoot at the bottom. I am under no illusions that we may be looikng at another 5 - 6 years of underperformance on stocks. However, with a 20 year horizon and faith that we are not at the end of civilization, I think there is an historic opportunity to build wealth. If I am worng, I won't post to complain....there will plenty of others doing that.

bearingdown 17 hours ago
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The opportunity is much greater than this time last year - I think it will be an even better opportunity in 6 to 12 months. No need to lose another 30 to 40 percent before starting to make some back. I'll stay in cash until the short term (50 day) MA crosses back over the 200 day MA.
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Independent1 4 hours ago
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Well said gents. We all need to eat. The rest of the world needs us to pay back what we owe them. Everyone has a fiat currency. Why shouldn't the system remain--you all want more dollars even though they are worth less every day (the recent short-covering rally nothwithstanding). Everyone you pay every month still takes dollars and they pay their employees with dollars.Whose to say that this weekend the G-20 meeting doesn't come up with some clever natural resources backing for currencies? Say a combination of timber, coal, maybe a theoretical 'agricultural commodity production value' for the US dollar. The gov't would still be able to print money with reckless abandon, so they'd be happy. And then USD value is all about 'proven natural resources reserves' or some such thing.The continuation of financial markets and civilization does not preclude a total 90% equity drop, similar to other periods of forced liquidation (like the '29-'32 bear market). I'm not saying that will happen. Keep in mind that in that scenario, valuations don't matter. The margin clerk called, you just have to answer. So all of these arguments about good dividends and companies that will "be there" on the other side of this economic turmoil, don't really matter in the short term. In the long term--really 20-30 years--I'm getting more bullish every day. There is no reason to rush in here in my opinion. We will get to own stocks when truly nobody else wants them. Until then the game is about making as few mistakes as possible and preserving capital and, if possible, purchasing power.
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Putz 18 hours ago
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If God had intended for us to have 20/20 hindsight - he would have put eyes in our A$$es.None of us have crystal Balls.

allhatandnocattle 17 hours ago
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"None of us have crystal Balls". But, I know a guy with a glass eye.
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twodogs78 17 hours ago
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And some of us do have Salty Chocolate Balls.
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Independent1 4 hours ago
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some have brass.
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jbkj 17 hours ago
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That's right. Nobody has crystal balls. But one thing is clear. During the 12 year period, many people other than the investors made a lot of money: the money managers, CDO and CLO packagers, brokers, etc. By the end of the day, it's the investors who are holding the bags. When you think about it, maybe we should question whether the modern portfolio theory or investment strategy is going to work. Or maybe the fundamentals are more important: trade deficit, fiscal deficit, declining currency, high commodity prices, etc. For buy and hold or long term investors, we need to be always skeptical about what the "investment experts" tell us to do. That’s the lesson learned from the last 12 years.

Independent1 4 hours ago



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Maybe the lesson that should have been learned is that everyone should fundamentally understand what They own and why they own it and under what circumstances they should sell it.Bottom line: It's your money to lose.
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Bully4U2 17 hours ago
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Mark Hulbert, you need a vacation. This article is such a pile of nonsense. All Hulbert has done is present an argument as to why an investor should not buy and hold. If a person is doing their own investing, even if it be in mutual funds, over that period of time, the investor should have been re-configuring his/her portfolio on a regular basis. You cannot compare a static government bond portfolio to a stock/bond portfolio that should have been continually changing.
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jamesa40 17 hours ago
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WHY, WHY, WHY???Why do people constantly try to make a point by saying that if you had invested EXACTLY at this time point, you would have made/loss x? Who does that kind of investing. I can only imagine 1 shmuck out of 6 billion people reading this and saying "Wow. I guess I shouldn't have put my entire nestegg in stocks exactly in this time period like the writer said!" What BS! Can't we have a reasonable argument based on the assumption that most people invest their measly paychecks month-to-month? I would believe you'd hit a larger audience than the first scenario. Come'on MW, gimmee something useful.

twodogs78 17 hours ago
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Basically it's laziness - at least, that's my take on it. That kind of analysis would require real work, instead of recycling some article that probably ran in Barron's 15 years ago.
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MortgageMillions 16 hours ago
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THE MYTH OF THE MARKET IS REVEALED. Anyone who has bought and sold a business before can understand that you cannot just "buy and hold" a stock - because over 20 years things change and company internals change. Stock market is a great thing but its not a pension plan. Social Security was, but we broke that.

cekim 16 hours ago
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Social Security never rally was either... It can't work... I think in the long term, the only way for the majority of Americans (those making their money via W2 taxable income) to save for retirement is to abolish the Federal Reserve and create/provide a monetary system which is sufficiently stable in the very long term that you can just "save" and buy very safe bonds and retire just fine... This attempt to put everyone into the market is as foolish as trying to "insure" everyone. It can't be done. There is no stock market or insurance system which can provide "everyone" a return while "everyone" is exposed to the entire risk... The trouble with this reality is that it takes decades to show itself. Moreover if we convinced "most" Americans to simply save money, buy bonds, CDs etc, they'd still hear stories of "that guy" who made millions in the market and they'd want to try... In the end, the only system that will work is one that rewards those who act responsibly and punishes those who don't. Anything results in the majority of people behaving badly (spending more than they make, failing to save, taking too much risk... )

Scrooge 13 hours ago
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Social security could work if the investments were in gold/silver not US-Tbills. Pay into the system the system buys gold/silver.This would allow a hard asset to back SS and the system would be solvent today. It would also keep congresses hands off of it because they would need to come up with the metal not just IOUs.Sure some glitches would have to be worked out but i think most people would feel better about SS if there were hard assets backing up their retirement. Wouldnt you?
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Marsden 7 hours ago
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"In the end, the only system that will work is one that rewards those who act responsibly and punishes those who don't."Which is exactly why Disaster is staring America right in the face. We hardly even have a clue, and the chickens have only begun to "come home to roost."Wish I had happier news, but until we--individually and as a nation--begin to behave responsibly, happy news isn't in the forecast. Lesson One is "Spend Less Than You Earn" and it's so very basic. And we haven't learned it yet.
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Buzzbomb 14 hours ago
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I haven't even finished laughing about the Dow 16,000 prediction and now I get to see him telling us what we already KNOW to be the case. Great work by Hulbert yet again. Can't tell you anything about what might be coming with any degree of accuracy or for any solid reasons but can tell you the obvious, that silly little cash outperformed over the last 10 years.... Though I will argue that folks in cash didn't necessarily sleep easily over the last 10 years---it's not easy looking at massive unrealized capital gains that could have been had a few times along the way. It took as much guts to stay in cash during that period as it does to be in stock for the same period.
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Mozaic 12 hours ago
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Sheesh, NOW you say that the market isn't going to be 16k by the end of 2008 Mark? Geez, doesn't take much to make you change your mind... Can you say chicken little?
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OldFarmer 11 hours ago
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All this hindsight is great. How about using objective metrics of when stocks are cheap and when they are expensive? They're cheap enough now that returns over the next decade are likely to be pretty good. If the market gets cheaper, then returns over the following decade should be even better. When stocks are expensive, using objective metrics such as ten year trailing PE's, don't buy them. The returns are likely to be subpar. You may get hammered a bit if stocks temporarily get cheaper and you may miss the last fling on the way up, but your average return will be acceptable.
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sunny129 10 hours ago
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The above article is clear rebuke of BUY & HOLD tooted by Bogle and other notable 'EXPERTS' for the last decade. The next decade may be still worse than +2.9%! Stay tuned!!
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Sputnik571 8 hours ago
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Buy and hold only works in Bull markets, when the overall upward trend can cover your mistakes. In Bear markets, you just end up holding depreciating assets, loosing sleep and eventually give up.
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Formulator 12 minutes ago



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What nonesense: Hurlbert does it again....he takes a snap shot in time an applies mathematical reasoning to that particular window in time. Keep it simple, I don't do options, shorting, forex currency trading nor speculation. Invesmtent managemet is about protecting principal and understand the trule of buy low sell high. It includes: real estate, T-bills, saving bonds, mutual funds and individual stocks. I could write the same article stating it is wiser to put your money in the mattress.
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Formulator 11 minutes ago




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