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WHY REAL ESTATE:
Stock Market Alternative
The Stock Market Myth*
What has the stock market historically returned? With hindsight generally being clear, this seems like a simple question to answer. But the answers you might receive can be as diverse as the ones you might receive if you asked about the future of the stock market. Warren Buffet took a shot at answering both questions in his 2007 letter to Berkshire Hathaway’s investors. Click here to read his actual letter (page 19) or keep on reading to get the paraphrased explanation.
Buffet states that the actual return of the stock market over the 20th century was 5.3% as the Dow Jones went from 64 in 1900 to 11,497 in 1999. To those that tell you the historic return has been 10% or higher, chances are they’re talking about a specific time period when the market was peaking. Buffet also contends that the 20th century was a good century for the American stock market. Compare the America that exited the 19th century versus the one that entered the 21st. We developed from a mostly agrarian society to become THE greatest economy in the history of the world. Can that performance be repeated?
Consider the same historic returns projected forward. If the market were to exit the 21st century still compounding annually at 5.3%, the Dow would close above 2,000,000 in 2099. At the end of the first eight years, the market was slightly above 8,000. Can the market rally for the rest of the century and climb 1,992,000 points? You be the judge. And to the advisers that tell you to expect 10% + returns long term, tell them that the market would have to close at 24,000,000 in 2099 to achieve that growth! That would be one heck of a bull market.
See the chart below (click to enlarge).
This chart supports Buffet’s claims and also demonstrates another facet of the market. An upward market move is usually followed by a sideways move of a similar length of time. The 16-year boom in the roaring 20’s (up 7.2% YOY) was followed by a 12-year period of declining value (-1.5% YOY). Then came the 17-year post WW2 period where the market grew steadily (11.3% YOY) followed by an 18-year period of virtually no growth (.5% YOY). Then came the ‘80s and the market skyrocketed with investor euphoria for 15 years (17% YOY) until the end of the century. We’re now 8 years into a sideways period, which if history repeats itself, will not end for another 5-10 years.
Fortunately, there is a stock market alternative: real estate. You can get started with individual self-directed retirement plans or small business retirement plans.
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