David Bianco, chief U.S. stock strategist at Bank America Merrill Lynch, suggests that the investors made far less in the past 50 years than the S&P 500 suggests, as quoted in Bloomberg.
While the S&P 500 returned an average of 9.5 percent annually for the 50-year period, the comparable figure after all the adjustments [ed. trading and management costs, dividend and capital-gain taxes, and inflation] was a mere 1.3 percent, according to Bianco’s calculations. Both averages are geometric, a multiplication- based method often used to calculate average returns.
So, what to make of all these surprisingly meager returns?
Well, Bianco himself says that this signals that now would be a good time to buy U.S. stocks and that stocks, given that inflation and trading costs are low on a historical basis, justify a higher premium to the market. He thinks the market has about 11% higher to run.
- The Curious Capitalist believes that this proves we need an entire overhaul in how we think about and save for retirement in the U.S.
- The Audit doesn’t like the smell of these numbers and criticized Bloomberg for not including the assumptions used in computing the meager returns.
- The Globe and Mail does an OK job dissecting what Bianco is actually saying (while not saying too much).
Whether Bianco’s numbers are right, what’s interesting to me — and for readers of this blog — is the potential connection between decrease in trading costs and future returns. Low commissions, tons of free content online, crowdsourcing, screening, piggyback investing, and trade mirroring — all these essentials of the New Rules of Investing (and part of my upcoming book) are part of this process.
