Is a Lost Decade for Performance Coming?
By Roger Nusbaum, AdvisorShares ETF Strategist
Jason Zweig had a blog post over the weekend titled The New Era of Low Stock Returns. In it he made a John Hussman-like argument that based on the current CAPE PE ratio we should expect average annual returns to have a two-handle over the next ten years.
These types of arguments are not new, they are based on historical price action and this time will either be the same/similar or it won’t but for this post I found the comments to be more interesting than the post itself.
The general tone of the comments was to deny the possibility that there could be low returns for the next ten years based on whatever reasons and logic that the reader felt was compelling.
This sort of sentiment is typical behavior from all types of investors when confronting the end of a bull cycle. Think back to how common this was in 2000 (“6000 is a chip shot for the NASDAQ”) and 2007. The point here is not to say that the bull is over but to acknowledge that at some point it will end, that many investor behaviors that have coincided with previous tops will coincide with the next one, whenever that is.
Instead of trying to deny the possibility/expectation of low returns for an extended period it makes more sense to game plan for the possibility. In the ten years ending March 2010 the S&P 500 had negative returns. In that time, select foreign markets (including emerging markets), many commodities and various alternative strategies all did well, outperforming the S&P 500 and so diversified portfolios with exposure to these segments had the opportunity to defy the S&P’s return during that time.
Whether it is actually the next ten years that has poor returns or some other ten year period is unknowable and unpredictable which of course makes the argument for maintaining a diversified portfolio with exposure to the various asset classes. There will be periods where that diversification outperforms the S&P 500 (like the previous decade) and times where it lags like the start of the current decade.
At a higher level it is important to game plan the composition of your portfolio for the long term. There will be periods of generally good performance in the market (this will be most of the time) and the occasional declines (12-18 months is a normal duration) and a portfolio’s strategy and composition need to account for cycles and rotating performance leadership. No segment of the market can be the best for all times.