Statistics Don't Always Tell The Whole Story
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Wikipedia describes statistics as "a mathematical science pertaining to the collection, analysis, interpretation or explanation, and presentation of data." In other words you collect data on a subject and then interpret it. As a result, depending on what variables you incorporate, you can make the data read pretty much what you want it to.
For example, an article in the Wall Street Journal this week discusses how stocks are in a "lost decade." True enough the Standard & Poor's 500-stock index, the basis for about half the trillion dollars invested in U.S. index funds, hit 1352 this past week, which put it right where it was at 9 years ago. But what about the past 15 years, or the 5 year period from September 2002 to October 2007 when the S&P was up 96% ? How do you want the data to read? What is your time horizon? What is your risk tolerance?
What is true is that stocks have out-performed fixed income and inflation since accurate records have been kept (since the 1920's). Historically, stocks rise about two years out of every three, for an average gain of 7% a year. But what differentiates one period from another is obviously a change in the variables. So far, the current decade hasn't featured the high inflation of the 1970's or the high unemployment of the 1930's. That makes some analysts hopeful that the stock troubles won't be as bad or last as long as they did back then, despite the mortgage and lending crisis.
On the other hand some, like Yale economist Robert Shiller, warn the market still hasn't shaken off its excesses. He predicted the market troubles in his 2000 book "Irrational Exuberance." Richard Sylla of New York University's school of business finds that when stock investing becomes a mania, as it did in the 1920's, the 1960's and the 1990's, it leads to prolonged periods of subpar performance. Also unknown at this point is what effect consumer spending will have on staving off a market recovery. The government said Friday that consumer spending in February grew just 0.1% before inflation compared with the previous month, even though incomes showed decent gains. Consumer spending on clothing, autos and other goods is weakening under a job market and the housing downturn.
So the conventional stock-market wisdom that says that if investors buy a broad range of stocks and hold them, they will do better than they would in other investments, may need some caveats. Many investors have learned the hard way that you can't become married to a stock or a particular group of stocks. General Motors stock is worth less than half what is was 10 years ago. Delphi shareholders will get next to nothing if and when the company comes out of chapter 11 bankruptcy. You have to constantly monitor and evaluate your portfolio. It is always difficult to make changes of any sort, but particularly difficult when it comes to investments. But there comes a time when you have to "throw out that old shoe."
Meanwhile, remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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