According to Rydex, “history shows that the market typically moves in cycles. In the past 114 years, there have been four bull markets (shown in green) and four bear markets (shown in red). Investment strategies that work in bull markets may not be effective in flat or bear markets.” Of course, a wise investor knows that the past does not predict the future – and a statistician knows that four and four makes eight, but not a huge sample size. Also, of course, the Dow Jones Industrial Average is not the whole market.
So what can we take away from this, which may or may not imply we are in the middle of a multi-decade bear market? That now is the time to invest outside of equities? That would be a temptation, to be sure, but the market always seems to know better: right now, the expected returns on bonds is quite low, cash is negative and supposed safe havens like gold likely have a lot of room to drop compared to their room to rise. Moreover, while returns can be flat (or slightly negative) for long periods, stocks do always seem to rebound in the end – not a guarantee, but certainly a pattern. The Death of Equities is a classic illustration, published by Businessweek right before the start of a multi-decade bull market.
If there is an (in)actionable lesson, it may be one more obvious than the graphic or its intended message: stay the course. A boring conclusion, perhaps, but in a world where everything is potentially overpriced (or under-priced) diversification is once again the most useful component of an investment plan. For a retiree, bond yields are low to negative in real-dollar terms, making equities attractive in a relative comparison. For a younger investor, a few more years of flattish overall returns means more time to invest while stocks are cheap and wait for a recovery.