The Past as a Guide?

So what’s reasonable to expect? History can be a useful (though not infallible) guide in setting expectations. History tells us (and finance theory agrees), long term, increased volatility (done right) increases return.

Now, some may argue the past isn’t a reasonable guide at all! That was then, and “it’s different this time,” and the world is some new, horrible place. We’ve entered into long-term decline, and stocks (bonds, too, for that matter) will never get anything close to their historic returns, and we should all stash gold bars in our backyards. So on and so forth.

First, I would say, if your outlook is so dire, forget gold. What you want is a rifle. And maybe a dairy cow and a tall fence. And re-read Chapter 4 (as well as my 2011 book, Markets Never Forget).

The past isn’t predictive of the future. And that stocks, bonds, cash, gold, real estate, pork bellies, baseball cards and anything anyone buys and sells and believes has value did something in the past doesn’t mean it must do the same thing in the future. However, investing is about probabilities, not certainties. In capital markets, there are no certainties. Rather, you can use the past to inform you if something is within the realm of reasonable to expect.

One example: Early in 2009, in the final days of steep bear market volatility, when a bottom was forming but few could see it for all the wild market swings, many folks were fiercely fearful of stocks. There was plenty of ink spilled by professionals ...

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