Predicting the Market is Risky, Of Course, But Looking to the Past Can Provide Guidance

“Stocks are ridiculously overpriced. But bonds are worse. Make no mistake: Investment bargains are scarce. Treasury-bond yields are at their lowest level in four decades, while stocks are overvalued based on most market yardsticks.

“Still, to make decent money, you need to take risks. “Some experts have argued that bonds are in a bubble, comparable to the early 2000 bubble in stocks. Their fear: Interest rates will rocket higher.”

The above passages all came from the Wall Street Journal. And, based on current market conditions, one might assume this article was written sometime in the past month. Yet surprisingly, this was the lead-in to an article written more than 18 years ago by legendary financial columnist Jonathan Clements in his weekly column, “Getting Going.”

To put things into perspective, when the article was published on Jul. 16, 2003, the Dow Jones Industrial Average closed at 9,094, and the 10-year Treasury note generated a yield of 3.95 percent. This same index closed at 34,390 on Sept. 30, 2021, with the 10-year note yielding 1.53 percent.

In reflecting on the past 18 years, I would like to share my thoughts on this data, if only to glean simple wisdom for the next 18 years.

Today’s valuations on common stocks appear to be overvalued by any measure, just as they were in 2003. But that didn’t stop the Dow from generating returns over the last 18 years, almost identical to its historical returns, going back to 1926. So what do the next 18 years have in store? From a planning perspective, the prudent approach would be to include returns less than historical averages in one’s portfolio growth projections. A 30 percent reduction in future returns (7 percent versus 10 percent) still would put the Dow Jones Industrial Average at a price target of about 100,000 in 2039.

Projecting future returns on bonds is far easier than stocks. Exhaustive data reveals that the best predictor of future returns on bonds is based on today’s current yields. Incorporating today’s returns in bonds would target about 1.6 percent yield on the 10-year Treasury note and about 2 percent on intermediate term corporate bonds, reflected in Vanguard’s bond fund VCIT.

As Clements’ WSJ article reminds us, predicting future returns on both stocks and bonds is risky indeed. Looking out over the next 18 years, Coffeehouse Investors focus on the following:

• Capture as much of the bond and stock market’s return as possible through index funds, whether that return is 2 percent, 4 percent, 7 percent, or 10 percent, annualized over the next 18 years.
• Update portfolio projections annually, so that expectations of future returns match the reality of returns as they unfold.

Despite the headwinds, investors who embrace my principles accentuate their chances of reaching personal and financial goals. That’s what living your rich life is all about.