What Should We Then Expect (From Investing)? | Mauldin Economics

What Should We Then Expect (From Investing)? | Mauldin Economics



...Ed just updated his data for 2018, so here’s the latest.

Source: Crestmont Research.

If you buy when the orange valuation line is high, returns for the next 10 years (the green bar directly below) are generally less than impressive and sometimes dismal.

...As Ed says, “Starting valuation matters.” If you overpay you will likely underperform. And if you bought into stocks prior to December, you probably overpaid. The time to buy is, like the saying goes, when blood is running in the streets. And that’s not now, last quarter’s volatility notwithstanding.

Empty Quarter

You can look at this in other ways, too. Rob Arnott’s team at Research Affiliatescalculates 10-year expected returns for many asset classes based on expected cash flows and changes in asset prices, instead of extrapolating past returns.

Research Affiliates further calculates expected volatility, which lets them produce the classic risk-reward scatterplot below. The vertical axis is expected return, the horizontal axis is expected volatility. The ideal investment (high return, low volatility) would be in the upper left quadrant. Unfortunately, that area is blank.

...

Source: Research Affiliates

Instead, we see a wide variety of asset classes clustered in the lower left, indicating low returns and low volatility. Rob’s forecast is pretty bleak if you want more than about 4% returns over the next decade. Some major pension plans (which assume 7% or more) will be in serious trouble if this is anywhere close to correct.

...a disciplined risk-management process. In most cases, that means removing emotions from the equation. But how?

There are all kinds of methods, but here’s one very simple one as an example. The 200-day moving average identifies an asset’s long-term price trend. You can use it to stay on the right side of the trend. Stay exposed when the current price is above the 200-day MA, get out when it drops below.