Tag Archives: facts

For The Average Investor, The Next Bear Market Will Likely Be The Last

Just recently Anna-Louise Jackson published an interesting article asking if “The Financial Crisis” still haunted your investing. To wit:

“This month marks the 10-year anniversary of the current bull market’s beginnings. Yet, many Americans remain reluctant to invest in the stock market, a scary hangover from the 2007-09 recession.

From October 2007 to March 2009, the S&P 500 plummeted nearly 57% and it took more than five years for the index to recover. But the share of Americans with money invested in the stock market still hasn’t returned to pre-recession levels, according to various studies.

In 2018, a Gallup Poll survey found 55% of respondents were invested in stocks or stock funds, either personally or jointly with a spouse, down from 65% in 2007. Among those younger than 35, the drop-off is especially pronounced: An average of 38% of the youngest Americans owned stocks from 2008 to 2018, down from 52% in the 2006-2007 period.”

The rest of the article is the typical pedestrian advice of accepting that bear markets happen, ride it out, and hope for the best. (Read this for why you shouldn’t.)

What Anna missed was the most crucial aspect of what is happening to the relationship between individuals and Wall Street.

The Loss Of “Trust”

A surprising number of Americans who have financial advisors don’t trust them to act in their best interests. In a 2016 poll by the American Association of Individual Investors (AAII), 65% of respondents said they mistrust the financial services industry to some degree. In fact, only 2% of respondents claim to trust financial professionals “a lot,” while 15% say they trust them “a little.” 

It isn’t just the “Baby boomer” generation who have “lost trust,” but the up and coming millennial generation as well. 


Can you blame them? 

After two major bear markets, years of retirement savings goals were wiped out. More importantly, financial plans which depended on 6%, or more, in annual returns were decimated due to the time lost in getting to retirement goals. This isn’t just recently; this has been the case throughout history.

All those promises of “buy and hold” investing cranking out 7-8% average annual rates of return, every single year, have simply not happened. The chart below of real S&P 500 returns from 1965 to present with forward return projections, illustrates the problem. 

The forward projections are based on two assumptions:

  1. Current valuations which suggest weaker front loaded returns, and;
  2. Stocks remain in a longer-term trend of 7% average growth.

This is for example purposes only to show the issue of variable versus average rates of return.

In the example, while the market did indeed deliver 7% annualized rates of return, the years spent getting back to even following down years, corrections, and outright bear markets left investors well short of what Wall Street had promised them. (This is one of the fatal flaws in financial planning which is the use of “average” versus “variable” rates of return.) 

Compounding this problem has been years of Wall Street effectively “raping and pillaging” individuals for the benefit of their “institutional” clientèle. 

study by Lawrence Brown, Andrew Call, Michael Clement, and Nathan Sharp clearly showed the conflict of interest between their own self-interest and you. The study surveyed analysts from the major Wall Street firms to try and understand what went on behind closed doors when research reports were being put together. In an interview with the researchers, John Reeves and Llan Moscovitz wrote:

“Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren’t primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn’t their main job.”

The chart below is from the survey conducted by the researchers which shows the main factors that play into analysts compensation.  It is quite clear that what analysts are “paid” to do is quite different than what retail investors “think” they do.

“Sharp and Call told us that ordinary investors, who may be relying on analysts’ stock recommendations to make decisions, need to know that accuracy in these areas is ‘not a priority.’ One analyst told the researchers:

‘The part to me that’s shocking about the industry is that I came into the industry thinking [success] would be based on how well my stock picks do. But a lot of it ends up being “What are your broker votes?”‘

A ‘broker vote’ is an internal process whereby clients of the sell-side analysts’ firms assess the value of their research and decide which firms’ services they wish to buy. This process is crucial to analysts because good broker votes result in revenue for their firm. One analyst noted that broker votes ‘directly impact my compensation and directly impact the compensation of my firm.’”

The question becomes then “If the retail client is not the focus of the firm then who is?” 

The survey table below clearly answers that question.

Not surprisingly you are at the bottom of the list. The incestuous relationship between companies, institutional clients, and Wall Street is the root cause of the loss of trust in the financial system. It is a closed loop which is portrayed to be a fair and functional system; however, in reality, it has become a “money grab” that has corrupted not only the system but the regulatory agencies that are supposed to oversee it.

But it isn’t just Wall Street’s fault. 

You Are Part Of The Problem

While the “financial system” is very lucrative for Wall Street, as we discussed last week, it hasn’t been for Main Street. 

Most individuals desperately want to believe they are giving their life savings to someone they can trust, who knows more than they do, and will specifically look out for their best interest. 

As we have already established, the “advice” game isn’t really built that way. 

However, it isn’t all their fault. Clients also put their “financial advisors” into a precarious position of having to chase market returns or suffer career risk. 

I consistently meet with individuals who swear they are conservative about their investing. They don’t want to take any risk but want S&P 500 index returns. 

In other words, they want the impossible:

“All of the upside reward, but none of the downside risk.” 

This demand for performance, which requires an exceptional amount of investment risk, forces advisors to “cave to demands” rather than “do what is right” by their client. The risk to the advisor is that if they don’t acquiesce to the client’s demands, the client goes to another advisor who promises them the impossible.

It’s the same as going to a doctor who tells you to stop eating a pound of salt every day. Instead of doing what he says, you search out a “quack” who tells you it’s just fine. 

In both cases, in the short-term, it will seem as if the “quack” is right. In long-run, you will wind up paying a higher price than you ever imagined,.

You are responsible for keeping your greed in check.

“But if I had been conservative, I would have missed out on the bull market.” 

Not really. 

The chart below shows the nominal total return of stocks versus bonds. 

Since 2000, you could have owned a portfolio of bonds and virtually had the same performance as owning stocks without the volatility. (Okay, bonds underperformed by $1, literally.)

What Can You Do?

Here are the core principles we use with every one of our clients.

  • Understanding that Investing is not a competition. There are no prizes for winning but there are severe penalties for losing.
  • Checking emotions at the door. You are generally better off doing the opposite of what you “feel” you should be doing.
  • Realizing the ONLY investments you can “buy and hold” are those that provide an income stream with a return of principal function.
  • Knowing that market valuations (except at extremes) are very poor market timing devices.
  • Understanding fundamentals and economics drive long term investment decisions – “Greed and Fear” drive short term trading.  Knowing what type of investor you are determines the basis of your strategy.
  • Knowing the difference: “Market timing” is impossible – managing exposure to risk is both logical and possible.
  • Investing is about discipline and patience. Lacking either one can be destructive to your investment goals.
  • Realizing there is no value in daily media commentary – turn off the television and save yourself the mental capital.
  • Investing is no different than gambling – both are “guesses” about future outcomes based on probabilities.  The winner is the one who knows when to “fold” and when to go “all in”.
  • Most importantly, realizing that NO investment strategy works all the time. The trick is knowing the difference between a bad investment strategy and one that is temporarily out of favor.

Unfortunately, most investors remain woefully behind their promised financial plans. Given current valuations, and the ongoing impact of “emotional decision making,” the outcome is not likely going to improve over the next decade or possibly two.

Markets are not cheap by any measure. If earnings growth continues to wane, economic growth slows, not to mention the impact of demographic trends, the bull market thesis will collapse as “expectations” collide with “reality.” This is not a dire prediction of doom and gloom, nor is it a “bearish” forecast. It is just a function of how the “math works over time.”

This time is “not different.” The only difference will be what triggers the next valuation reversion when it occurs.

For most, the next bear market will be their last. 

After Two Of The Greatest Bull Markets In U.S. History, Why Are Boomers So Broke?

Last week, Jeff Desjardins of Visual Capitalist wrote in a post:

“While it’s true that putting your money on the line is never easy the historical record of the stock market is virtually irrefutable: U.S. markets have consistently performed over long holding periods, even going back to the 19th century.”

This goes back to Wall Street’s suggestion of “buy and holding” investments because over 10- and 20-year holding periods, investors always win.

There are two major problems with this myth.

First, on an inflation-adjusted, total return basis, long-term holding periods regularly produce near zero or negative return periods.

Secondly, given that most individuals don’t start seriously saving for retirement until later on in life (as our earlier years are consumed with getting married, buying a house, raising kids, etc.,) a 10- or 20-year period of near zero or negative returns can devastate retirement planning goals.

It should be obvious, when looking at the two charts above, that WHEN you start in investment journey, relative to current valuation levels, is the most critical determinant of your outcome.

(We have written a complete series on the Myths Of Investing For Long-Run. Chapters 1, 2 & 3 cover the concepts above in much more detail)

Baby Boom Generation Should Be Rich

Let’s look at this differently for a moment.

The financial media and blogosphere is littered with advice on how easy it is to invest. As noted above, over long-periods of time there is absolutely nothing to worry about, right?

Okay, let’s assume that is true.

The “Baby Boom” generation are those individuals born between the years of 1946 and 1964.  This means that this group of individuals entered the work force between 1966 and 1984. If we assume a bit of time from obtaining employment and starting the saving and investing process, most should have entered the markets starting roughly in 1980.

So, despite the little “flatish” period of the markets between 2000 and 2013, the markets have been in a extremely long rising trend. (One could argue the bull market which began in 1980 is still going.)

And, if we look at it the way the financial media and most financial advisors show it, the bull markets have exploded personal wealth historically. (The chart below is the cumulative percentage gain (real total return) of the S&P 500 index.)

Despite those two little minor percentage drawdowns, baby boomers have been fortunate to participate in two massive bull markets over the last 38-years.

So, given this steadily rising trend of the market, most individuals should be well prepared for retirement, right?

The why isn’t that case. Let’s take a look at some of the myths and facts.

Myth: Everyone contributes to a retirement plan.

Fact: Not so much. 

According to a recent NIRS study only 51% of Americans have access to a 401k plan.

More importantly, only 40% of individuals actually contribute to one.

Here is another way to look at it. Almost 60% of ALL WORKING AGE individuals DO NOT own assets in a retirement account. 

And of those that do own retirement accounts the majority are of the wealth, unsurprisingly is owned by those with the highest incomes.

It’s actually worse than that.

The typical working-age household has only ZERO DOLLARS in retirement account assets. Importantly, “baby boomers” who are nearing retirement had an average of just $40,000 saved for their “golden years.”

Lastly, only 4-0ut-of-5 working-age households have retirement savings of less than one times their annual income. This does not bode well for the sustainability of living standards in the “golden years.”

Myth: Individuals save money in lot’s of other ways.

Fact: Not so much.

According to the study by MagnifyMoney:

“Although the average American household has saved roughly $175,000 in various types of savings accounts, only the top 10 percent to 20 percent of earners will likely have savings levels approaching or exceeding that amount. 29 percent of households have less than $1,000 in savings.”

So, What Happened?

If investing is as easy as the financial media and advisors portray it to be, then why is the vast majority of American literally broke?

Go back up to that S&P 500 cumulative percentage gain and loss chart above.

That is the most deceiving chart ever made to convince individuals to plunk their money down in the market and leave it.

As Mark Twain once quipped:

“There are three kinds of lies. Lies, damned lies, and statistics.” 

Using percentages to dispel the impact of losses during bear market declines false into the “statistics” category.

If the market rises from 1000 to 2000, it is up 100%. However, if it then falls by 50%, you don’t lose just 50% of what you gained. You lose 50% of everything.

If we revise the chart of the real, total-return, S&P 500 chart above to display the cumulative gains and losses in points, rather than percentages, the reality of damages from bear markets is revealed.

You will notice that in every case, the entirety of the previous bull market advance was almost entirely wiped out by the subsequent decline.

So, what happened to all those baby boomers? Well, let’s walk through the sequence:

  1. Age 30’s: In 1980 the “baby boomer” generation is working, saving, and participating during one the 80-90’s bull market.
  2. Age 50’s: From 2000 to 2002, the “Dot.Com” crash cuts their savings by 50%.
  3. Age 53-57: From 2003-2007 the full market grows savings back to their previous level in 2000.
  4. Age 57-58:  The 2008 “Financial Crisis” wipes out 100% of the gains of the previous bull market and resets savings values back to 1995 levels.
  5. Age 58-63: From 2009-2013 financial markets rise growing savings back to the same levels in 2000.

At the age of 63, “baby boomers” are staring retirement in the face. Yet, because of the devastation of two major bear markets they are no closer to their retirement goals than they were 13-years earlier.

This problem is clearly shown in the retirement statistics above.

But it is actually worse than that.

From 2008 to present, the S&P 500 has more than tripled in value. Yet, as shown by the table from Fidelity investments below which is a great sample size for most Americans, 401k accounts and IRA’s barely even doubled.

The reason, of course, is psychology. Despite the best of intentions, psychology makes up fully 50% of the reason investors underperform over time. But notice, the other 50% relates to lack of capital to invest. (See this)

These biases come in all shapes, forms, and varieties from herding, to loss aversion, to recency bias and are the biggest contributors to investing mistakes over time.

These biases are specifically why the greatest investors in history have all had a very specific set of rules they followed to invest capital and, most importantly, manage the risk of loss.  (Here’s a list)

The problem that is unfolding for investors going forward is that while the mainstream financial press continues to extol the virtues of investing in the financial markets for the “long-term”, the assumptions are based on historical data which is not likely to repeat itself in the future. 

Jeff Saut, Liz Ann Sonders, and others have continued to prognosticate the financial markets have entered into the next great “secular” bull market. As explained previously, this is not likely to the be case based upon valuations, debt, and demographic headwinds which currently face the economy.

More importantly, as John Mauldin recently noted:

“When that next recession and bear market hit, it will take even longer to bounce back. The recovery will be even slower than this last one. As the research I’ve shared in previous letters shows, large amounts of debt slows recoveries. Very large amounts create flat economies. We are approaching large amounts in the US…but I think the recovery will be much slower, at a minimum. A double dip recession is clearly possible, making those stock market index fund losses even worse.”

John goes on to restate what I have detailed many times previously,

You must have some kind of strategy for dealing with market volatility. 

Invest in programs that give you at least a chance to dodge bear markets. Buy and hold works in theory, but not for most people because we are humans with emotions. We should recognize that and take steps to control it. “


He’s right. Combine high levels of debt, with high valuations, and psychological impediments and the outlook for investors isn’t great.

Does this mean you should NOT invest at all when valuations are high?

No. What it means is that you have to CHANGE the way you invest.

  • When valuations are low and rising, you absolutely should be a “buy and hold, dollar cost averaging, investor.”
  • Conversely, when valuations are high, you have to shift your thinking more to capital preservation and being more opportunistic on how you invest.

Controlling risk, reducing emotional investment mistakes and limiting the destruction of investment capital will likely be the real formula for investment success in the decade ahead.

With this in mind, individuals need to carefully consider the factors that will affect their future outcomes.

  • Expectations for future returns and withdrawal rates should be downwardly adjusted.
  • The potential for front-loaded returns going forward is unlikely.
  • The impact of taxation must be considered in the planned withdrawal rate.
  • Future inflation expectations must be carefully considered.
  • Drawdowns from portfolios during declining market environments accelerate the principal bleed. Plans should be made during rising market years to harbor capital for reduced portfolio withdrawals during adverse market conditions.
  • The yield chase over the last 8-years, and low interest rate environment, has created an extremely risky environment for retirement income planning. Caution is advised.
  • Expectations for compounded annual rates of returns should be dismissed in lieu of plans for variable rates of future returns.

Chasing an arbitrary index that is 100% invested in the equity market requires you to take on far more risk that you likely want. Two massive bear markets over the last decade have left many individuals further away from retirement than they ever imagined. Furthermore, all investors lost something far more valuable than money – the TIME that was needed to reach their retirement goals.

Yes, you can do better. 

You just have to turn off the media to do so.

There should be no one more concerned about YOUR money than you, and if you aren’t taking an active interest in your money – why should anyone else?