As I have observed the extreme volume of flows of capital into and out of the stock market over the last few years, I first thought about writing a post about market timing and why dollar cost averaging beats trying to time the market. However, what began as a post about market timing changed to this post on historical asset returns, which I believe more accurately frames the question.
I really enjoy the chart below, which can be found in Stocks for the Long Run by Jeremy Siegel, "...it traces year by year how real (after-inflation) wealth has accumulated for a hypothetical investor who put a dollar in (1) stocks, (2) long-term government bonds, (3) U.S. Treasury bills, (4) gold, and (5) U.S. currency over the last two centuries. These returns are called total real returns and include income distributed from the investment (if any) plus capital gains or losses, all measured in constant purchasing power."
From 1802 - 2012, the real returns are staggering. What is also interesting is the overall stability of the returns of stocks. Note that the returns of stocks fluctuate above and below the trendline but eventually return to the trend, which is called mean reversion. No other asset class has the stability or, frankly, power of returns that stocks have.
In the short term, stocks fluctuate a lot, which is driven by world events, changes in earnings, interest rates, uncertainty and the four horsemen of investor psychology: optimism, pessimism, fear and greed.
During the last year, a lot of wealth has been destroyed by speculation in cryptocurrencies. I can't help but think that much of that speculation was driven by asset managers with well-incentivized sales and marketing teams. These groups preyed on well meaning folks to gather as much money as possible. They had the added benefit of operating in a largely unregulated market while the government played catch-up. Further, as the prices of cryptocurrencies rose, it tapped into the ever-hungry "fear of missing out" syndrome so common in our society.
I sat back and watched the cryptocurrency fiasco play out and found myself wondering if these cryptocurrency assets would even be a blip on the radar for an updated edition of Siegel's chart.
I have heard two main arguments from cryptocurrency advocates. The first is that these new digital currencies are, in fact, currencies. If that is true, then I would imagine that they might follow a similar path in the above chart to the U.S. dollar.
The second argument that I've heard is that cryptocurrencies are a store of value - similar to gold. If that is true, then I would expect this asset class to follow a path similar to gold on the chart above.
Neither asset class, frankly, can be considered attractive.
Zachary Oliva is the: