Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Monday January 4, 2021. 

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

A Really Long Term (30 Years) Stock Returns

We have looked at long term stock returns in the US several times. For example, in newsletters like July 17, 2017: Long Term Stock Holding Periods For Retirement, we stated that to achieve a reasonable return, ‘one should hold S&P 500 for 20 years while for a long term timing portfolio, at least 10-15 years (preferably 15 years).‘ 

Some readers have challenged us that ‘there is no guarantee whatsoever to get positive returns for 20 years’. Admittedly, in scientific and absolute terms, we agree that there is indeed no guarantee for any future result. Some further referred to the long term Japanese stock returns. In fact, if one were to look at the Japanese stocks, one would be able to find plenty of periods when stocks didn’t even have a positive return for the whole 20 years. In this newsletter, we would like to look at this issue in more details. 

Japanification?

First, a few words why even investors in the US and the western Europe need to be aware of the Japanese experience. As many might have known, Japan went through a huge boom and bust cycle that is still felt today: the economy and the financial market were extremely frothy by the end of 1989. During the boom time, Japanese companies used cheap debts to finance their spending and growth, only to produce one of the greatest stock bubbles in history. The following shows the Nikkei 225 stock index (Japan’s main stock index) history: 

Nikkei 225 peaked in late 1989 and after that, it’s been a long winter. Even today, the index is still about two third of its peak value in 1989. That’s been more than 30 years. 

It’s been pointed out that the main reason that caused this long chilling winter in Japanese stock market is that too much debts were incurred before the peak in 1989 and because the government didn’t want to take a more thorough, painful method to let financial markets to solve the solvency of those highly indebted companies, the authority instead piled on more debts to prop up these companies and many became so called zombies: they barely survived and had no prospect to grow. 

This does sound and look more and more familiar to those in the US and Europe: we are now in an either negative interest or sub-zero interest rate environment and central banks are adopting extremely loose monetary policies, injecting huge debts to the economy to support weak businesses. The current Covid pandemic makes this even more so. 

The following chart shows the total outstanding debts and cash (cash is really a form of debt) in the US: 

We can see the debt has increased steadily. It shot up this year because of the pandemic. 

The following chart compares the debt with S&P 500 index value: 

So it does look like the debt grows even faster than the stock index. 

Though one can argue that the US is not like Japan as we have a much more diverse economy and also the US dollar is the world reserve currency etc. However, the main factors that caused Japan’s long slump: high debt growth (and ultra-low interest rates), unwilling to let markets to take care of solvency naturally and the extreme stock valuation (the US stocks are in historically high valuation though are still not the same as Japanese ones in 1989) are all present in the US currently. So it’s at least a valid concern to compare and learn from the lessons in Japan. 

Long term Japan stock returns

Now let’s take a look at some of long term returns for Japan stocks. Specifically, let’s take a look at various 30 year periods.

Based on the site, we can see the following annualized returns for a couple of 30 year periods: 

30-year period Annualized Return (including dividend)
1990-2020 -0.29%
1980-2010 2.5%
1986-2016 2.4%

If you are unlucky and invested at the peak of 1990, you would still lose money today, after a long 30-year period. If you were ‘lucky’ and started to invest 10 years or 5 years way before the peak, you would be able to get about 2.5% annual return for the next 30 years. This is of course depressing, considering 30 years is the bulk of a person’s active investment years. 

What we can learn from the above is that, even though our fundamental assumption still holds for Japanese stocks: Japanese financial market is a reasonably fair market place and thus stocks or equities as a whole should give their owners’ better returns than ‘safe’ investments such as bonds and cash in a long term, the long term, in Japan’s case, should be more than 30 years. Or put it another way, there is really no guarantee to say stocks (even in aggregate or market index terms) can always return better in a 20 or even 30 year time frame. 

US stocks

Of course, we have many plausible reasons to say the US will not become Japan (the Europe, however, might be a bit less so, depending on which countries). However that doesn’t give investors a good reason to celebrate: after all, we not only don’t want to experience Japan-like depressing stock returns, we want to have returns such as 8 to 10 percent per year in a reasonably long period of time. So just merely not like Japan is not entirely encouraging. 

However, but various reputable long term stock metrics, one can say the returns for the coming years are not promising, to say the least. 

On one scenario, based on Hussman’s and others, stocks will probably return 0 or even negative for the next 10 years. So if we calculate the 30 year period, that would mean the average annual return from 2000 to 2030 would be about (1.074^20)^(1/30)-1 = 4.8% (from 12/31/2000 to now, S&P 500 total annualized return is about 7.4%, from now to end of 1930, assuming no growth every year). This return, will probably not much better than the overall inflation. Also, this annual 4.8% return for a 30-year period will probably be the lowest rolling 30-year annual return in the whole S&P 500 history. 

The above scenario is for people who are probably 45 or 50 years or older (who had started their investments 20 years ago). For young generation who just started to invest now, if we assume no growth in the first 10 years and then back to 10% per year return for the next year 20 years, they will get ((1.1)^20)^(1/30)-1=6.5% annual return for the next 30 years. Again, for the current young generation who will start to face retirement 30 years later, the return prospect is not very encouraging (though slightly better than the current soon to retire or retirees, assuming still a tame inflation). 

To summarize, a buy and hold index (aggregate) stock investor will probably not experience the horrific Japanese stock returns in the coming years (hopefully, though no guarantee either way). However, it’s also extremely likely that the investor will no longer enjoy an 8 to 10% annual return for a 30-year period for both those have started investing 20 years ago or those who just started. In our opinion, as stocks are becoming more and more expensive, the only way to achieve a close to historical norm (8 to 10%) annual return will be those who are employing tactical strategies such as our AAC or TAA

Market overview

Well, we were wrong about the pandemic: we were a bit more optimistic a couple of months ago, thinking that the current wave won’t be as bad as what happened in March-April, at least in terms of number of daily deaths and (less so) hospitalization. Unfortunately, currently, the 7-day moving average of daily deaths has already surpassed that in April, the previous high:

This is really unfortunate humanely. The question is now whether this will derail the economy and/or the financial markets. As explained before, the current financial markets are very much upside-down, conditioned to the ultra stimulated fiscal and monetary policies (and hopes of the soon to be deployed vaccines). At the moment, some areas have adopted stricter lock down policies that can affect economy. Fortunately, this is happening in a holiday period and hopefully, major part of economy might not be affected as badly. 

As always, we are cautious and have no illusion that something bad might not happen. Given the current market conditions, one should be prepared for the worst. We should follow our strategies to navigate through this period:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation now reached another high. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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