Monday, October 27, 2008
Yesterday I came across three different articles that I thought all tied to a similar theme about whether we should or should not rely on the idea of stock prices going up over the very long term. There were also comments on the blog this weekend along the same lines.
Regardless of what the futures holds, asking these types of questions has become much more popular because the S&P 500 is 18% lower than where it was exactly ten years ago and the world is in the middle of a financial crisis that has yet to be sorted out.
The first article was by Felix Salmon that makes a case for reorienting expectations toward dividends rather than capital gains.
The second article is from David Leonhardt about why prosperity is not an unalienable right.
The last one was an interview, of sorts, with Jack Bogle advocating stocks as an asset class are attractively priced now that they are down a lot, maintaining a diversified portfolio and that the world is not ending. You may not know this but Bogle has a pretty good track record for recognizing cheap markets and expensive ones. He says now it is cheap (this is obviously a long term opinion not short term).
This evokes two reactions in me. First is more of a practical idea which is easier said than done, but save more money. We have all read statistics about the savings rate possibly being zero or negative (the tracking of this tends to be flawed and while I'm not sure what is accurate it is obviously very low). There is tremendous psychological value in having savings and being a few months ahead in your checkbook. It provides a greater margin for error and a sense of accomplishment having set something meaningful aside.
The other initial reaction is a reminder that how we define retirement will have to change if it has not done so already. More people will have to figure out how to derive income for longer. That could mean working longer in your career, transitioning to some sort of secondary career, monetizing a hobby or something else.
I've written a few times about my neighbor with the backhoe, another neighbor who plows roads and driveways here in the winter and a hiking friend who has all the work she wants as a dog sitter. Some who is 50 and has had a hobby of some sort for a while will know whether it is possible (realistically speaking) to monetize it or not. At the same time someone who is 50 has enough years to figure something out if they don't want to work at some store or the like.
Candidly I am far less worried about the long term fate of the stock market versus the fate of social security and medicare. I have been writing for ages about the possibility of lower than normal returns in the US (hence the need for more foreign IMO) but believe the US financial system and stock market will resume functioning. While I am no expert on social security and medicare the numbers there make no sense to me. The worker/recipient ratio is out of whack and it stands to get worse.
As mentioned above the S&P 500 is down 18% from ten years ago (SPX closed at 1072.32 on October 26, 1998). Ten year periods like this are not unprecedented but are rare. Some element of looking forward and imperfect discounting still exists in how the market functions. The stock market warned of future trouble in q4 2007 when it started to roll over. The crash now being worked through is imperfectly discounting a worsening of GDP growth and higher unemployment.
The US has encountered serious financial problems before and recovered successfully on some sort of timetable and I believe it will do so again even if things look different on the other side. Success must include responsibility for your own actions like saving more, figuring a way to generate income for longer and my favorite; living below your means. This approach can help mitigate continued bear market equity results and an altered entitlement program.