The ASX200 is back to where it was in 2006

The ASX200 is back to where it was in 2006

The ASX200 almost fell to the 5,500 mark this week. We’ve been at that level 28 times since 2006.

Anyone who retired before the financial crisis must be absolutely red hot furious by now. Every time they hear a financial advisor say “stocks go up in the long run”, or “buy and hold”, their blood must boil.

Source: Yahoo Finance

Even those still in the accumulation phase must be getting grumpy.

Not that anyone should be surprised by all this. Buy and hold was always a dodgy proposition. It’s downright bizarre that it’s become the industry standard just when it hasn’t worked for more than a decade.

Stock always go up in the ‘long run’? Not so

And Australia is far from alone. In the past year I’ve lived in Australia, Japan and the UK. All three countries’ stock markets disprove the mantra “stocks go up in the long run”.

Try telling a Japanese person that stocks go up over time. They’ll chuckle and change the subject – the Japanese way of telling someone they’re bonkers. And they’d be right.

Japanese stocks fell for more than twenty years. And they’re still nowhere near their 1990 highs. My Japanese in-laws’ neighbour held onto the “buy and hold” myth for too long. She eventually committed suicide over her stockmarket losses.

Now twenty years of stockmarket losses sound bad. But Britain’s FTSE100 isn’t far behind. Check out this headline from Bloomberg on December 6th:

Yikes. 18 years of stockmarket action and the FTSE100 is back where it started.

Here’s the proof, from the Bloomberg article:

Source: Bloomberg

Notice how the UK stockmarket has been at this level over and over again in the past two decades.

Take a closer look and you’ll notice stocks spent most of those 18 years valued at nowhere near their 1999 levels. Retirees who relied on the stockmarket rising for their livelihood would’ve been bitterly disappointed.

To be honest I’m mystified that the buy and hold myth still exists after so many years of being disproven.

A medication that failed that long would be banned. Can you imagine the sales prospects of a car that got you nowhere after 18 years? Or further away from your destination after 28 years – the Japanese version. You’d assume the car was broken after the first few minutes.

And yet, most Australians and Britons own stocks, one way or another. At least the Japanese have largely given up.

The real worry is where this leaves Australia’s retirement system. Super funds are famously overinvested in shares. And the rosy projections for how wonderfully this would work out are not exactly going to come true with the market going nowhere.

The government’s solution is to make Super contributions even higher. If a government program is failing, send it more money.

Misleading and deceptive advertising

Believe it or not, despite their miserable performance, those stock market indices dramatically overstate real investors’ returns. That’s because stock market indices are extremely misleading.

You don’t buy the ASX200, you buy a mix of the stocks in it. And the difference is the key.

Of the 30 stocks originally included in the US’ Dow Jones Industrial Average index, how many remain?

Until a few months ago, only one remained. And here’s how GE performed over the last 20 years, before it dropped out of the Dow as well.

Source: Yahoo Finance

Buy and hold that.

All the way down.

It’s even more embarrassing when you compare the chart to the Dow Jones Industrial Average Index, in red:

Source: Yahoo Finance

Do you see the difference?

That’s -85% for GE, while the Dow Jones Industrial Average went up 124%.

The New York Times’ shares left the S&P index in 2010. By then, investors lost four fifths of their money. And they missed out on the recovery since the company left the index.

The most recent company to get thrown out of the FTSE100 fell 50% before leaving the index.

My point is, what you actually invest in, and what the stockmarket pundits are pointing at going up over time, are completely different things.

The Dow isn’t an anomaly. Of the original 500 companies in the S&P 500, less than a fifth remain. Of the companies in UK’s FTSE100 when it launched in 1984, only 25 remain. And only four of the companies in the UK’s FT30 index from 1935 are still in the FTSE100 now.

But how do the finance professionals and their academics justify their “buy and hold” claptrap? By pointing at charts of stockmarket indices going up. While the stocks that are actually in those indices, and in investors’ portfolios, crash out.

I think the premise of “buy and hold” is false advertising.

The question is, what should you be up to instead?

Until next time,

Nick Hubble Signature

Nick Hubble,
International Contributor, The Daily Reckoning Australia