"In the long run we are all dead" goes the famous quote from
John Maynard Keynes.
What Keynes was suggesting is that economic (and thus financial)
theories are meant to hold true over the long run, potentially
longer than any one's lifetime. Over the short run there
could be substantial variances from where those theories suggest
normalcy should reside. Individuals could be waiting a very
long time for reality to actually intersect with long run
theories. In other words, timing actually is everything.
Investors have witnessed firsthand a similar script over the
last 20 years as there have certainly been very good times to buy
equities but also very bad times.
Buy and hold investors spent much of the last 20 years wondering
if they made the wrong decision. Buy and hold, the theory
states should work over the long run. However, for buy and hold not
to work for 20 years, or over 1/3 of one's adult life, would be
detrimental from an investing standpoint for countless numbers of
Depending on which year you happened to actually invest capital
made a world of difference as to the reality of your success
If we haven't learned anything the last two decades, then at
least let us realize that when it comes to investing over the long
run, timing actually is everything.
Consider this scenario:
You just inherited $100,000 and are wondering what asset to
buy. You have just watched the markets skyrocket in two
bubbles the last 20 years, crash in two hangovers afterward, and
now again enter levels that are lofty historically. Depending
you chose to invest that money was the one single most important
factor in its performance over the last 20 years.
Not the stock you chose, not the dividend it paid, not even the
asset class itself mattered more than the timing of that decision.
(For more on why stock picks don't matter near as much anymore see
about diversifying in today's environment)
Figure 1 below displays the annual performance of the S&P
500 from the dates shown through today. Depending on which
year you happened to put money to work was the most significant
factor in your annual returns.
Figure 1: Average Annual Return From Given Year through
Modern financial theories such as Buy and Hold also suggest that
the earlier you invest the better and more robust your returns will
be. They suggest that over the long run you will be better
off. They are wrong as Figure 1 shows over the last 15 years,
the earlier you invested in equities, the worse off you were.
It shows that most importantly is timing, as someone back in
1999 should have in hindsight sat out of the stock market
(NYSEARCA:SDS) completely until 2009, being invested in basically
any other asset while they waited. In 2009 the timing for
equities was the best it had been in over 15 years as the average
annual return of stocks through today was below 10% every year the
past 15 until 2009 when the average annual return was above
15%. The timing in the late 90s and early 2000s was one of
the worse, but in 2009 was one of the best.
Keynes could not have been more dead on.
In the long run we are all dead, therefore we shouldn't use
theories for time horizons that don't align with our own. We
need strategies that work better over shorter time frames.
A Better Way to Time
In our December ETF Profit Strategy Newsletter published
11/22/13 we provided analysis displaying how overvalued stocks
(NYSEARCA:IWM) were compared to another popular asset, Treasuries
"As has been the case time and time again in history, this
time is not different, mean reversion will occur, and the bond
versus stock equilibrium will eventually return to more
normalized levels likely resulting in much lower equity
Although this is expected to play out over the next few years,
already Treasuries have outperformed stocks by 4% in only two
The chart below is similar to the one provided subscribers in
that Newsletter and shows the valuation relationship between stocks
and the Case Shiller Home Price Index (NYSEARCA:XHB). Which
one of these assets should you put your $100,000 into today?
Figure 2: Stocks versus Real Estate - 15 Year
Based on the past 15 years of valuations, right now stocks are
getting expensive compared to the average home price since the
median price for the S&P 500 is around 8.5x the Case Shiller
home price index. Based in home value, the S&P is again
approaching year 2000 price levels.
Using relative strength analysis like Figure 2 displays can help
investors visually see price comparisons across assets.
Someone with money to invest in either stocks or real estate in
2000 looking at this tradeoff would have quickly seen that stocks
were significantly overvalued compared to real estate.
Likewise, in 2005 and again in 2009 stocks were significantly
undervalued compared to real estate. Investing in stocks in
the mid-2000's or in 2009 would have been a much better choice than
Today, similar opportunities exist when deciding whether to
invest in stocks, bonds (NYSEARCA:JNK), real estate, and gold
Profit Strategy Newsletter
uses relative strength and other technical, fundamental, and
sentiment analysis to help investors find themes for the long
run. Our Mega Investment Theme report focuses on the 10 key
topics for investing in 2014 including equities that are now at
lofty valuation levels. This is true not just when measured
by the typical U.S. dollars, but also when measured by the
purchasing power of other assets such as real estate and bonds.
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