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By yttire
June 2, 2005

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If we look at VTSMX over the past 5 years, we notice something stunning, so unusual and mind defying that it may cause you to lose sleep. Over this time frame (according to Bigcharts) it went from around 33 five years ago to 28.62 today. This is the entire stock market over a five-year time frame. If we back up it is trading around the range it was in July 1998, around 27.

So we have endured around 7 years of basically no gains for those who are invested in index funds. Are we really sure that index funds are a good place to invest? Further, are we really sure that the domestic stock market is really the only game to play in town?

This also tells me that some people buying stocks, probably about half, ended up on the short end of the stick. Whether it was in mutual funds, individual stock picks, or index funds on the wrong sector- they ended up actually worse off for taking on their risk over a seven-year time frame.

A money market yielding 2.5%, with no risk, would have gained me 18% in that time period, while the entire stock market gained us 0.83% a year. Hopefully Bigcharts is not including the dividend, because that will at least bring us back into money market range. But still, investments dumped into prepaying a mortgage would have kicked the stock markets a$$ up and down Wall Street with zero risk. How exactly am I being compensated for risk here?

Well, now you might start arguing that you should have been investing in SPY, but basically that is starting to look like a repeat of the nifty fifty, and if you actually look is has taken a substantial loss since 2000 (from 150 to 120)

Or you may turn your head around five times exorcist style and then point out that the stock market has been gaining 10.8% a year for decades, therefore it will continue to do so. You are ignoring the past 7 years, because if you back those out, you are looking at more like 8.9% Also, you will pointedly ignore the rising P/E during that time which accounts for 2-3% of that growth, ignore inflation accounting for another 2-3, and also ignore that we are at a historically high P/E right now. Our expectation of the future should be diminished accordingly. WEB tell us so because he hoards his cash, hoping for a rainy day, waiting for the values to roll in like breakers on the ocean.

So basically some of us, like WEB, are hoping for a crash, so we can get in while the getting is good. Many of us appear to be buying up houses like hotcakes, to make up for our portfolio failures in the market. Others are looking for inefficiencies, either through mutual funds or individual stocks. Some of us are looking the other way and shoveling money onto the market like crazy, and simply crossing our fingers.

We all know the stock market will go back up.

But what if- what if the stock market simply took a while to go back up? What if it didn't crash and offer a slew of opportunities to WEB, but merely hovered up and down, slowly gyrating towards a normal historic P/E, or even undershooting it a bit and dropping down to around 12 over a longish time frame?

That could easily mean 10 years of basically no growth for sitting in an index fund, and you would be better off shoving it in a money market account.

The problem is that even if the market is going to go back up- many of us are going to be retiring at some point where those 10 years actually shoulda, woulda, coulda, made a difference to our retirement portfolio.

Thus, it is no mystery why all the large corporate pensions are going belly up- they figured, just like you are- there would not be a protracted bear. Fortunately, they have the taxpayer to fall back on- so all those lucky dudes and dudettes who worked under congenial big brother will have you to pick up their retirement tabs when their portfolio managers optimistic projections fall short. But what about those of us who have been slaving away without a congenial big brother to pull us out of the muck? I suppose many of you have an investment advisor who has contacts in the government and will see to it that a special handout is devised for you if their carefully tailored mathematical model falls apart.

It is an interesting question. I am not advocating here not to invest in stocks. I am merely musing on diversifying my own portfolio more fully into foreign stocks, REITS (which seem overvalued), bonds, and other investment vehicles. I am also musing that indexed funds may not be as great an investment vehicle when the market is overvalued- if you are not exploiting the inefficiencies in the market in an overvalued market, then you are merely taking on risk with no reward.

Indexed funds make a ton of sense in an undervalued, normally valued, or even slightly overvalued market- because the time frame for growth is small enough you are guaranteed to come out ahead before you retire. But as the stock market climbs, that time frame moves further and further out. Add strange unaccountability on the parts of those handling the deficit and other large uncertainties, and it seems that time frame moves even further away. At a certain point, when that time frame begins to border on when you are sailing through life in a bed, perhaps it is time to look, or at least glance, at the other investment opportunities on the grand buffet of risk.


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