Vitaliy Katesenelson reckons that equity markets will stay range-bound for another decade or so. What does an era of very modest returns signify for passive investors?
- How confident are you in your stock-picking skills? A range-bound market still follows the logic that investors, on average, will earn average returns less expenses. If stocks barely keep up with inflation, I think it is far less risky for average investors to simply save more than trying to beat the markets. Dividend investors will be pleased to hear that an average of 90% of total returns in past range-bound markets came from dividends.
- The time horizon of most investors is far longer than 13 or so years. If your retirement is more than two decades away, the best time to gather assets is when they are reasonably priced. Even someone who is 55 and a decade away from traditional retirement has an investment time horizon that could be as long as 30 years.
- Unlike bull markets, stocks’ dominance over bonds and cash in range-bound markets is marginal at best. Diversification in cash and bonds will allow you to generate excess returns by taking advantage of volatility in equity markets.
- In an era of modest returns, it is even more important to pay attention to costs and taxes. If your stock-picking skills are marginally better than average (barely beating the markets), active investing may not be a game worth playing.
