Unloved Bull Markets

Chapter 8Betting on a Lackluster Stock Market and Higher Interest Rates

Investors who did not recognize that the stock market was in a multiyear bull market and didn't fully participate simply lost an opportunity to increase their wealth. Their actions didn't hurt anybody else, just themselves. Investors who expected interest rates to increase missed an opportunity to earn high returns in stocks and bonds, but their inaction didn't hurt anybody else. There is, however, an institutional example in which the belief that the bull market was not for real and the belief that interest rates would rise combined to cause a disaster and hurt a lot of people. First, some background.

You may have noticed on investment advertising the disclosure “Past returns are no guarantee of future results.” That warning is a standard requirement for advertisements, but there is a group that doesn't believe it. They believe past returns are predictive of future returns. They are called actuaries and they usually have an office in the basement of an insurance company. Based on historic returns, actuaries believe they know the probabilities for returns for any future period such as five, ten, or twenty years. They and the insurance companies they work for count on the stock market repeating itself. Insurance companies take in premiums for policies, promise or guarantee a modest return to the policyholder, and invest a portion of the premiums in the stock market for its higher returns. The insurance company ...