In effect, [investors have] decided that, in a market as volatile as this one, the only way to win the game is simply not to play.
The cash that is built up on the sidelines has been talked about for a while with some believing that it will provide a big lift to equities. I tend to discount the argument because the cash we hear about includes money that was never and will never be put into the stock market.
The more interesting nugget is the psychology or impatience that leads to people giving up. Many believe that capitalism is broken and that capital markets no longer work. I hope I have been clear that I disagree with that idea. Clearly some things have changed with economies and debt levels such that it has weighed heavily on equity market returns for many of the largest markets but long dry spells have occurred in the past--this is not unprecedented in terms of how the market has reacted.
That we are 12 years into this for the US and almost 23 years in for Japan certainly makes the slog long in the tooth but as pointed out in many previous blog posts there have been plenty of other markets that have had normal returns or better than normal over the last 12 years.
The extent to which the above New Yorker quote has any merit it expresses people's inability to see the long term and to understand why they are actually invested. I contend that for most people the real objective is to have enough money when you need it which is usually upon retirement. Then of course the money needs to last during retirement.
In that context the time horizon becomes decades and for many of those decades there are two elements of portfolio growth; price appreciation and savings. Periods where the growth is not so hot needs to be met with more savings. Some will say that this is unknowable but I don't think that is exactly right.
It is not terribly difficult to look at some basic macro economic indicators and see whether things look relatively healthy or relatively unhealthy. Looking at the big picture and concluding things aren't going well and that an increase in savings, if possible, is warranted is not a form of wild speculation. Similarly concluding that things look ok and maybe the normal 10% 401k contribution might suffice is also not reckless. Neither scenario guarantees success but this is not black box type work.
Taking one step further I think that people can also look at macro economic indicators for several countries and see where things might look promising and perhaps favor those and see where things look bad (unfavorable demographics, lousy debt situation and so on) and either avoid underweight those markets.
Again there is no guarantee of success but I do believe in the long run the market weighs these attributes accordingly with the last decade as supporting evidence and for most people it makes more sense to think in terms of decades not years.
The picture is from yesterday's fire training.