Trader’s Narrative

Equities, as an asset class are supposed to beat everything else in the long run. But how long is the long run supposed to be?

Is 10 years enough to be considered long run? For the past decade, equities, as measured by the S&P 500 index have been the worst asset class:

The ultimate shaming is that even a risk-free money market rate beat the dividend reinvested returns provided by US stocks. As for the other asset classes, they left equities in their dust. For me, the most surprising is the high return provided by long term government bonds. Of course, by far the best asset class was gold.

The last time we looked at this metric was in February (thanks to a chart from the New York Times). Then, the 10 year inflation adjusted return was -5.1%.

Here’s a chart of the S&P 500 index showing how we’ve see-sawed above and below the 1000 level more than a few times:

And while this is pretty horrific to anyone who was invested in equities for the past 10 years and actually expected the proverbial 10% p.a. return, it may not all be gloom and doom going forward. That’s because such negative returns over rolling 10 year periods are actually quite rare. Looking at a graph of the 10 year returns of the S&P 500 index, you notice that whenever things get this ugly, forward returns are very good. You can check out the chart in the commentary I wrote back in late November 2008: Why Long Term Investors Should Consider Buying.

That was written when the S&P 500 had an 8 handle. It dropped significantly lower so anyone with a long term time horizon would have gotten in early. But they would still be doing well right now.