24 February 2010

The Bear Truth About the Stock Market

There was an interesting article in Monday's Globe about the failure of U of T to get good returns on its pension, having lost nearly 30% in the last year. More interesting, however, was the data the Globe presented for the pension asset management results of 23 Canadian Universities.

In the 1-year returns, U of T was at the bottom with -29.1%; Saskatchewan did the best with -11.1%. Tough year.

Over 4 years, U of T was still the loser at -1%; Guelph at 3.7% and Ryerson at a whopping 5.6% were the leaders. Barley half returned 2% or more over four years.

Over 10 years, U of T was still at the bottom with 3.1% annualized return. Only Quebec and Ryerson managed to edge past the 7% annualized return figure. Mean return was about 5.5%. Nominal inflation over the period was 23%, so reduced those annualized figures by 2% annually for the real figures (e.g. U of T returned a real 1% over 10 years; average real annualized return about 3.5%).

Remember that these are universities, each with substantial assets and professional management. They are way better positioned to invest intelligently in the market than are you and I. And yet, over ten years not a single one of these 23 institutions has been able to secure any substantial investment return. Would you accept 5% annualized over 10 years (before inflation) as a good return on your own retirement investments, even though they're not a large diversified portfolio with dedicated professional full-time management? Doubtless the answer is 'no'. But how could you expect to do better? 

Now take a look at historical data for the Dow Jones. If invested broadly in the market, the average investor lost money over the last ten years, even before accounting for fees and inflation. The average investor would have been better off sticking their money in the mattress back in 1999 with a note saying "open if the world ends neither on Y2K nor in 2012".

In fact, the same is true for the 16 years from 1966-1982: over that period, the average investor was better off not putting a penny in the stock market.  Since WW2, there have been two periods of steady increase: 1944-1966, and 1982-2000. The first was characterized by a general expansion and an increase in well-being and productivity across the board. The second was characterized by 'efficient' markets and astronomical profits for market-makers, with little to no increase in well-being for most people (real wages have been stagnant for over 20 years, including during the 90's bull market).

So, the fact is that the savvy investors who tell normal people to diligently save 10% in their RRSPs and stick it in a mutual fund are LIARS. It is they who benefit from this kind of investment. An investor *might* profit in a very strong bull market, when rising tides raise all ships. But in normal market conditions, in fact, the stock market does not have a history of generating wealth for the vast majority of the citizenry. It has a history of generating and losing wealth in cycles that normal people cannot predict or profit from, and cycles that are fundamentally unrelated to the actual productivity and well-being of the population. If they stuck their money in a mattress, at least they would not be giving 2% of it to their 'advisor' each year.

Of course, I don't recommend mattresses, but there are *plenty* of ways to invest other than giving your money to Wall Street. Because once you do that, they will tell you that what's good for the market is what's good for you - and you'll believe them, although the data clearly reveal them to be liars. And it's a small step from there to voting for people who will give your financial benefactors great advantage at your own expense, because what's good for them will eventually trickle down to you. Right?


Anonymous Anonymous said...

Well researched article. I would point out though that investing in indexes (even a low fee one) is not necesarily the best way to go.

Yes the market can create long term losses. Good management (that costs money BTW) avoids the pitfalls that you write about.

A mutual fund with a strong record of performance (even with a fee much higher then 2%) is the way to go. Paying .5% a year for zero management is pointless.

February 24, 2010  
Blogger Gavin Magrath said...

Thanks. It is certainly sometimes true that sometimes you get what you pay for, and that there is such a thing as good advice.

But remember, there's only one way to buy the market and that is by paying the lowest possible MER to get a market fund. If you concede the market can't give you returns on 0.5% MER, then you essentially concede that the market is a shitty asset class to include in most investors' portfolios, and that was my entire point. Stocks are only for those who can pay for an reliably expect better-than-market advice (even assuming those advisors are out there for sale, which seems unlikely). Normal people should invest in businesses they can see and touch, right in their own communities.

February 25, 2010  

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