Rather Sensible Bits and Pieces About Stocks

The stock pot was simmering pleasantly for a long time. No more. Stocks were brought to a boil a few times recently. While they were simmering, we got used to the pleasant fragrance of positive returns. Then the fall and winter of 2018 turned up the heat.

Suddenly the gentle, wafting fragrance of the long-term return on stocks stopped smelling so good.

Sure, things turned from negative to positive in 2019. But, despite that, it sure looks like the simmering's done.
 
Now that the investment gods have stirred the stock pot, little bits and pieces of new flavors and fragrances begin to emerge. Here's a sampling (with some culling from realinvestmentadvice.com):

• Stock returns over 100 years certainly look appealing. But does that provide a reason to go "all in" on stocks - even if you've got a longer-term horizon. Think about it. What's your horizon: 5, 10, 20 years? If you're 25, it's likely longer than that. Then again, hardly anyone who's 25 invests much if anything. Why? Mostly because they don't have money to invest. Simple. If you're older, your horizon shortens. And, frankly, for many folks that's more like the aforementioned 5, 10, 20 years. If that's how long you have to build up some sort of nest egg, do you want to put all your dough into stocks?

• But what about if you're 35 and have, let's say 30 years to invest? By 35, some folks have some extra dough to invest. Going with that scenario, things can look pretty rosey - if stocks basically rise. But do they? Better still, will they? What happens if there's a "flat" period of 12-15 years within that 35 year period? What does that do to the odds of achieving those juicy average 100-year returns on stocks?

• What drives those 12-15 years? Valuations. They don't matter so much for the short-term. Witness today's stock market. Valuations by so many metrics are simply stratospheric. Yet the stock bull market seems to want to keep going up (despite the recent kerfuffles). That's not true for longer horizons. When you look out 10 or more years, you've got to consider valuations. And if they're high - like now - chances are returns will be low. That's just the way things work. As valuations rise, returns fall.

• Lo and behold, ownership of equities are currently at histoically high levels - along with valuations. You have to wonder how disappointed folks a lot of folks may be in the future.

• The argument can be made that, based on current valuations, you can expect a return of "0" - as in ZERO - over the next 5, 10, maybe even 20 years. Of course, that doesn't mean "0" every year. Prices will go up and down, as they always do. But if you're retiring in 20 years, and your aggregate return is "0," what will that do to your retirement plans?

• Finally,

• There's a huge difference between loss of purchasing power and destruction of capital. When you that investing in bonds exposes you to loss of purchasing power (and it does), but stocks will prevent loss of purchasing power, consider the case where you lose a significant portion of your capital due to stock losses. Which would you rather lose - your purchasing power or your capital?

• Re Cash: It's often a better hedge than shorting. Shorting shifts the risk of being wrong from one side of the ledger to the other. Add in the plain fact that few of us can short with any hope of success (It takes special skills - and a good dose of fortitude) and you can see why protecting capital with cash might make more sense.