“When the weather changes, nobody believes the laws of physics have changed. Similarly, I don’t believe that when the stock market goes into terrible gyrations its rules have changed.” Benoit Mandelbrot
This brilliant mathematician speaks to the reality that the price of common stocks goes up and down. If you want the possibility of a high return, you need to take some risk.
Across the web there’s been talk about the death of equity investing.
Why? My guess is because investors have short term memories and believe since stock market returns’ under performed their historical averages during the first decade of the new millennium, they will continue to under perform.
Ironically, and the end of the 1990’s there was a similar belief, only in reverse. The media was filled with discussions about how we had moved into a new world of investing and the old rules didn’t apply. In 1999 after a decade of historical out performance of the equity markets, investors believed that the “new normal” would be stock returns in the double digit range.
Well, that didn’t quite pan out.
What happened in the first decade of this millennium is a reversion to the mean. After large out performance of stock investments, the equity markets under performed which moved long term returns closer to their historical averages.
Does that mean the future equity returns will now be lower than historical averages?
I guarantee that no one knows what the future holds!