PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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The S&P 500 Has Been Letting Us Down

Should anyone invest in stocks? The last decade has been a painful one for dedicated equity investors. In fact, in a reversal of the "normal" risk-return arrangement, the total return on the US Treasury has been substantially better than the return on stocks.

The charts below show the returns to a buy-and-hold investor; a combination of fear-and-greed plus consistently bad advice from their advisors has led most investors to buy at the top and sell at the bottom, making their returns substantially worse.

Just to round out this gloomy picture, it should be noted that these charts show the returns with reinvested dividends; most people spend their dividends and, in any event, the government always taxes them.

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Most of the money that has flowed into bad investments with bad timing was not that of the ultimate investors, those who need the cash flow the investments are supposed to generate; rather it was money professionally managed on the investors' behalf, in pension funds, endowments, mutual funds and the like.

It is not so much the stock market that has let investors down, but those who were entrusted with the fiduciary duty to protect the investors' interests. These people get paid no matter what they do and they are insulated from any form of punishment for their bad behavior.

Investors ... individuals, families, colleges, foundations ... all need to take back control of their investments. I can hear it now, something to the effect that this will expose the most vulnerable to thieves and scoundrels and, anyway, investors do not have the education to manage their own investments. But could they really do worse than they have at the hands of those who are supposed to be looking out for their interests now?

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The record of the American Era

Reflecting on the undeniable fact that investors have been ill-served by their advisors is one perspective.

Another is to suggest that perhaps the era of the American economy reigning supreme has ended ... it is certainly the case that we look more and more like Japan post-1989 every day. Perhaps our era began after WWII, 1950, say, and ended just before the real froth got onto to the dot-com bubble, 1998, say.

Perhaps it's inevitable: empires rise and then are supplanted by others ... it's just the natural progression of things.

Or perhaps it's reversible? More/better regulation might be suggested by one group. Less government intrusion would be the cry of another of the warring political camps.

Or maybe it's just cyclical ... look at the middle part of the charts: in 1964 America began a huge expansion of its government spending - war on poverty,etc. - and began a very expensive war: Vietnam. These events dragged the economy down through the 1970s but then we got free of them both and leaped forward.

We are once again seeing a huge growth in government spending and we are engaged in two expensive wars. Is it possible that we will suffer for a decade more, go through a Volker-esque catharsis and then leap forward again?

Everyone's got an axe to grind. So best to look after your own knitting and not turn your affairs over to anyone else. Que Sera Sera ... best to be sailing your own boat: chart your course and cancel your subscription to cable news.

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