| It's Different This Time
Barry Rabinowitz, CFP®, MBA, EA, IAR
As a CERTIFIED FINANCIL PLANNERTM Professional and Registered Investment Advisor, those are the four scariest words to me. However, it is never different. Markets reflect waxing and waning bouts of fear and greed. As Warren Buffet has said "in period of fear, it pays to be greedy, and when everyone is greed, it pays to be fearful."
Although the market, S&P, is up over 60% from the lows, individual investors continue to be fearful. Despite interest rates at 65 year lows, the Public continues to load up on fixed income assets- bonds, bond funds, and over $3 trillion in money markets. In fact, according to economist David Rosenberg, in a recent Business Week article, since the March lows, for every $1 invested in capital appreciation funds, over $10 has flowed into income funds. The same public that bought dot.com stocks in the 1990’s before they imploded, and rushed to buy real estate, because house prices never go down, are now loading up on income funds and bonds. Is it different this time? I doubt it.
This surge into fixed income comes at the end of a 25 year period where bonds have beaten stocks in the trailing two-, five-, ten-, 15-, 20-, and 25-year periods.* Even a cursory glance at history would inform these investors that the worst time to invest in an asset class is when it has had such a long run of strong relative returns. It is very likely that bond investors are positioned at the wrong end of a powerful mean reverting cycle.
So what can we discern from the above? Individuals loading up on fixed income vehicles will be disappointed, and equities, in my opinion, will offer much higher returns than bonds/and or cash in the future.
THE ERROR OF OPTIMISM DIES IN THE CRISIS, BUT IN DYING IT GIVES BIRTH TO AN ERROR OF PESSIMISM. THIS NEW ERROR IS BORN, NOT AN INFANT, BUT A GIANT.
ARTHUR CECIL PIGOU
* S&P 500 vs. Long-Term Government Bonds, monthly returns from Ibbotson Associates
| | Return to the Winter 2010 Newsletter |
| February 17, 2010
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