Here is a really useful histogram of the annual return of the S&P 500 going back to 1825. I found it on the web in a number of places. All attribute the chart to Value Square Asset Management but I am afraid I have been unable to find the original source document. (Click on the chart to get the full size version).
This is our fifth bear market in twenty years. Contrary to public opinion, business cycles have existed since businesses have existed and they will continue to cycle between boom and bust in spite of government's best efforts to control or eliminate them. If that is true, then ipso facto, capital appreciation investing cannot work.
Just follow through the logic with me. I need double digit returns to pay myself, pay Uncle Sam and keep up with inflation in retirement. Owning businesses, either directly or indirectly through the stock market is the only proven way to get double digit returns over long periods of time. But about every five years, the business cycle takes the market down with it. If I have to sell in order to create income to live and with capital appreciation, I have to sell in order to realize profits, which means in order to pay my bills I have to sell at a loss, capital appreciation cannot work. Let me repeat. It cannot work.
And yet, that is what we continue to be sold. It is as absolutely as simple as that and it doesn’t take a rocket scientist, Harvard MBA or Ph.D. in finance to see that is true. The problem is quite simply that our world has changed dramatically in the very short time since the 1980’s and our investments haven’t. It is time to change our paradigm. I don’t know how to put it any more simply than that.
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