No Inflation? Look Again.
By Brett Arends
The real bear market
When you count inflation, investors are still in the red
BOSTON (MarketWatch) — Your cost of living went up about 0.2% in September, says the government. Meanwhile your U.S. stocks went down about 8%. Ouch.
Your cost of living went up 0.3% in August. The stock market lost you about 6%. Ouch, again.
Your cost of living went up 0.1% in July. U.S. stocks? They lost another 2%.
Okay, three months isn’t much to go on. But let’s look at the slightly longer term.
So far this year the stock market has lost about 3.5%, even when you include dividends. That’s not too bad, right?
At the same time the consumer price index has risen 3.5%. So in real terms the stock market has cost you about 7%. A diversified basket of U.S. stocks — I’ve used the ultra-low cost Vanguard Total Stock Market Index VTSMX +1.95% fund as a proxy — will buy you 7% fewer goods and services than it would have done at Christmas.
Economists may talk about the threat of “deflation,” or falling prices, but steady, persistent inflation remains the reality for most people. Yet too many investors overlook it when looking at their returns.
It’s not what you make that counts. It’s what you make — if anything — in “real,” inflation-adjusted dollars.
On the surface, it looks like investors in the stock market have been making some gains, albeit slowly, over the past 10 to 15 years. Investors are up 120% since the fall of 1996, they’re up 50% over the past decade, and even over the past five they’re level. But when you factor in the rising cost of living, the true picture is far worse.
In real, inflation-adjusted terms, investors in the U.S. stock market have made effectively no money, even when you include dividends, since the spring of 1998. Even if you invested 10 years ago, in the panic following 9/11, you’ve made less than 20%. Over the past five years you’re down 12%.
And I’m flattering the performance figures. In reality few people have done as well as a low-cost index fund. Most people have had to pay 1% a year or more to a money manager. They’ve had to pay taxes on dividends. They’ve blundered in and out of the market. According to the definitive study by Dalbar Inc., largely thanks to poor timing the average investor has underperformed the Standard & Poor’s 500 index by more than 5 percentage points a year over the past two decades. By that standard, most investors have actually lost ground on Wall Street, in real terms, since about 1992.
That would mean most investors are in the red at least since the 1994 publication of Jeremy Siegel’s Stocks for The Long Run.
Since the 1999 publication of James Glassman and Kevin Hassett’s prophetic masterpiece, “Dow 36,000”? Don’t ask.
I’m assuming here that the official CPI figure is an accurate measure of the cost of living, which it almost certainly is not. There’s a good chance real inflation is at least one percentage point a year higher. If that is correct, the entire last 20 years have been a sham.
Even more depressing: “Dollar-cost averaging” hasn’t helped much. Someone who has been dollar-cost averaging into an index fund every month for 15 years has made a grand total return, gross, of less than 5%. Most of your investments over the past five and 10 years are still in the red.
In inflation-adjusted terms, we’re in a bear market that’s lasted for 15 or 20 years.
Rob Arnott, the contrarian investor who runs Research Affiliates in California, notes the sloppy thinking that got so many investors — and money managers — into this mess. “Stocks are wonderful assets if you buy them when they are cheap,” he says. “But stocks are just like any other asset class. Buy them when they’re expensive and you’re going to regret it.”
Meanwhile, everywhere on Wall Street you still hear the repetition of the same old mantras and the same old canards. Most of them can be spotted by their astonishing use of the present tense, as in “stocks outperform.”
Arnott adds that stocks are usually only cheap when everyone else is too terrified to invest. The only people who’ve made money in the past 15 years are those who invested in 2001 to 2004 and during the crash of 2008-9.
Today Arnott likes emerging-market stocks, which have just tanked.
Me? I notice everyone is too terrified to buy European stocks, and the banks.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for the Wall Street Journal.
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