March 8, 2012
Investors often use historical comparisons to help gauge expectations on their investments. While this is a useful practice, history is full of time periods that have little in common with one another. If we look at the returns of a balanced portfolio (60% stocks / 40% bonds) from the years 1900 through 2010, the inflation adjusted returns were roughly 4%. However, there were long periods of booms and busts. There were the post war booms in the 1920's and 1950's, as well as the deregulation / declining interest rate boom in the 1980's and 1990's. On the other hand there were painfully long bust periods such as the war decades and the Great Depression. My point is that some time periods were better than others. So it helps to focus on the time periods during which the overall economic environment is similar to what we are experiencing today to get a better understanding of what we might expect. Consider the following features of today's economic environment:
- High misery index
- High unemployment
- Rising energy and commodity prices
- Low inflation adjusted yields on government bonds
- Rising government regulation and involvement in the economy
- Decelerating productivity growth
It was Mark Twain who famously said that "History does not repeat itself, but it does rhyme." And so it is true today as the points above were also uniquely prevalent during the 1970's. Unfortunately the 70's were one of the long bust periods. But there were investments that did relatively well. So, when you are looking to the past to help inform your current decisions and expectations, pay extra special attention the 1970's. It may help you navigate today's stormy seas.
Brennan R. Redmond, CFA Vice President
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).