Since Dirty Harry first uttered the line “Do you feel lucky” in the early 1970’s the All Ordinaries Index delivered an average annual compound return of 11.7 per cent per annum up until the peak in 2007.
Add in 4.3 per cent of dividends and you had over three decades of 16% returns per annum. Invested in the All Ords one dollar turned into $134.
It has been an incredible three decades of asset speculation and price appreciation in both shares and property prices driven by people borrowing money to invest.
At its peak one of the big four banks had an Ad of a bloke looking enviously over the fence at his neighbour on a brand spanking new motor boat with the neighbour saying “Equity Maaate” like it was clever.
Borrowing to spend. Such was the confidence in the assumption of perpetual asset price appreciation. No wonder prices went up. No wonder we never questioned fees. It was a 33 year gravy train.
The question now is whether it can continue. For the last five years it hasn’t. The stock market has gone down 40 per cent. The word has gone out on borrowing to invest and driving asset prices up with money you don’t own in a game of eternal hot potato.
It is no longer considered smart and with the US and Europe saddled with unfathomable liabilities serviced by the printing of even more liabilities it is going to be years, decades even before it becomes fashionable again.
In which case if you are one of the 65-75-yea-olds that rode the asset price appreciation over the 33 years to 2007 you should consider yourself very lucky because the chances are that we will never see that happen again, not in your lifetime.
You are a millionaire retiree for a reason and although you have more recently lost capital and your income on your capital no longer meets your peak expectations you should now count your lucky stars.
And if happiness is expectations met, change your expectations. Going forward you will be much happier with lower expectations.
The whole finance and property industry is relying on the uptrend returning. On the “Perfect Wave” miraculously rising again.
Apparently the slump is temporary and the gravy train will resume. But they fail to tell you that for the 33 years prior to the “Perfect Wave” the stock market only went up 2.9 per cent per annum (less if you include the 1929 crash and the 30’s) and inflation was over 4 per cent.
People didn’t make money in the stock market unless they could pick stocks, they didn’t invest and expect to make money out of the trend. They invested in specific stocks not in every stock.
Wouldn’t we be better off making 2.9% our base assumption rather than 16%, won’t we be much happier with that. Then if we do get a bull market it’ll make us happy. At the moment the “Perfect Wave” is our base expectation and it’s unlikely to be met and it’ll make us unhappy.
The Bottom line is that if you are now a millionaire retiree that has ridden the stock market boom, the property boom and a business valuation boom built by debt fuelled consumer borrowing and spending then despite the pain of the last few years you now need to count your chickens not your eggs and be grateful for them because a lot of eggs are never going to hatch.
And for those of you who are not millionaire retirees because you spent the last 33 years living above rather than below your means, sorry but you have squandered a once in a lifetime opportunity
And for those of you who were born too late and haven’t ridden the wave and been transformed by other people’s debt fuelled exuberance the only thing you can say is “hard luck”. It was a moment in history and it has gone and you would be well advised to assume that the future for you is going to be something different.
But even you can thank the Lord for small mercies because you could be one of the unfortunates that saddled themselves with overpriced assets somewhere near the top, who funded it with speculative debt and now have little or no chance of getting their money back. Spare a thought for them. They not only didn’t make money, they lost it.
If happiness is expectations met, challenge your expectations.
Meanwhile the next 33 years is already upon us.
What is going to happen to your expectations if we go back to 1974? If we do it will involve the following:
• Not making money on your house.
• Not raising debt to fuel spending.
• Not borrowing to invest.
• Keeping a job and being grateful for your job.
• “I want I save” not “I want I get”.
• Reigning back on our spending expectations.
• Living below our means until the debt has gone.
In the stock market:
We need to assume that the stock market is not going to uptrend (so we’ll be wonderfully surprised when it does) and go back to what they were doing before the 33 year boom. We need to get good at picking individual shares again rather than selling and relying on a market uptrend.
Even if we’re wrong and the market goes into another relentless uptrend, we will be so much better off for the lower expectations and the heightened focus on making money on shares rather than making money in ‘the market’.
The Twitter feedback is that this is a really negative view point and we all ought to be optimistic.
Misplaced optimism is a bias that serves no purpose and this is not pessimism, it is not a prediction, it
is merely a prudent mindset that focuses on improving our stock market skills protects us from unhappiness.