Earlier today, MarketWatch highlighted the rather blunt investing advice that the ‘highly reputable’ investing newsletter, The Prudent Speculator, and its editor, John Buckingham, recently offered up to millennial investors:
“If you are 50 or younger, or have 10 years before taking money out, and do not have 100% in equities, you are crazy.”
And while we can certainly appreciate his attempt to achieve crystal clarity with his terse investing advice, the underlying message (i.e. put all of your money in equities right now or you’re a complete idiot) strikes us as slightly less than “prudent” and bordering more on “completely moronic” end of the spectrum. That said, we can understand that “The Completely Moronic Speculator” probably doesn’t have the kind of market appeal that Buckingham was shooting for.
Before we dive into the details of Buckingham’s justification for his rendition of the “Buy The Fucking Dip” strategy, we thought it would be ‘prudent’ to provide some historical context for his controversial call. His underlying premise is very simply that if you invested money in equities in 1927 you would have achieved average annualized returns of ~10% through 12/31/16. And, since it worked in the past, it will necessarily work for those looking to put money to work today as well.
To summarize, here is visual representation of Buckingham’s investing call for millennials:
And, here is his mathematical justification…a list of average annual returns by asset class from June 30, 1927, through Dec. 31, 2016. You know, because past returns are always a perfect indicator of future performance…just ask AOL, Pets.com, eToys.com or any of the other tech giants that achieved multi-million dollar valuations in 2000 and then promptly filed for bankruptcy a year later.
The S&P chart below perfectly illustrates why Buckingham’s ‘research’ is misleading, in the best case scenario, or simply moronic, in the worst. As you can see, all the ‘spectacular’ 85+ year returns of the S&P were delivered between 1980 and 2000 when the market returned an average of nearly 14% per annum. Returns from other periods, 2.55% from 1928-1980 and 2.45% from 2000-2017, have only served to dilute the ‘returns’ generated by America’s first epic stock bubble.
Moreover, it’s important to note that if you decided to take Buckingham’s advice the last time the S&P traded at bubbly multiples similar to today’s levels (i.e. 1/1/2000), and held your position for 10 years (again, per his guidance), a $10,000 investment on 1/1/2000 would have turned into a whopping $7,590 on 1/1/2010…
But sure, if you don’t buy stocks right now, with earnings multiples at 1929 levels, then “you are crazy.”