When to invest?

This interactive resource from the Wall Street Journal (hat-tip to the Wall Street Pit blog) looks at 10-year returns from investing in the NYSE (companies listed on the New York Stock Exchange) and the S&P (Standard & Poor's) 500, i.e. the top 500 US companies. The last 10 years look like the worst decade since records began.

Now, some may say that it's a great time to get back in. But if you look at the S&P 500 graph at bottom right, you'll see that returns are calculated in both nominal and inflation-adjusted terms. Sometimes you get an apparent gain which is really much less so, or even a loss, once you take inflation into account.

This is exactly what happened in 1970-79. My fear is that all the current monetary pumping will stoke inflation and the market will rise in nominal terms, but these gains will be undermined by a general increase in consumer prices.

If we have a re-run of the 1970s, it could be years before the market yields real returns.I've covered this topic quite a few times on my old blog - in this post for example, I show that in nominal terms, the worst point was in September 1974; but adjusted for inflation, the real bottom came in July 1982:


It's said that history doesn't repeat itself, but it rhymes. If anything, that has worse implications for us, because by any measure, the levels of debt in the US and UK economies are much higher than they have ever been in history.
I can quite believe that the market will zoom up a bit more, but my feeling is that we are in what is known as a "bear market rally" - a temporary upward twist before a slump. Gamblers may make fortunes in the current rise, but the reversals in a bear market can be unpredictable, sudden and savage, just like the creature after which such a market is named.
Personally, I'm in favour of diversifying investments, and building up emergency supplies of cash and the things you need for daily life. I don't expect things to run smoothly in the next few years.

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