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I read Carl Sagan’s poetic missive, “A Pale Blue Dot” often. Sagan wrote those five paragraphs to describe the 1990 image taken by the spacecraft Voyager 1 as it turned back to take a last look at Earth, 4 billion miles from home and heading to the fringes of our solar system. In that image, our planet appears as a tiny speck of light within a sunbeam.
Sagan’s message puts mankind’s place in the cosmos into perspective; his words are both humbling and inspirational—truly, he’s one of the great thinkers of our time.
When it comes to investing, some deep thinking can provide perspective on your finances. A reflective investor will find himself challenging some of the accepted beliefs held dear by the investment industry.
Far too often, investors are consumed by minutiae from the constant barrage of information. Investment advice is regularly dished out in reaction to the current environment. The investor who can push back from the desk and contemplate his investments in generational terms can overcome uncertainties that nag investors living in the moment.
Think about today’s 20-year-olds who have perhaps 70 years of compound-investing power in front of them. Seventy years ago, in 1944, the Dow Jones industrial average index was about 143. At 17,100 today, the DJIA has advanced 120 times in value, which equates to a 7.1-percent annual rate of return—compounded! A $1,000 investment in 1944 has turned into about $120,000.
Now, should the events in Ukraine and Israel deter a young investor from buying stocks today?
Remarkably, that 20-year-old investor will see the DJIA cross 2 million in 2084, if we assume a 7-percent annual rate of return. That sort of makes our worries over current events seem trivial.
The 65-year-olds retiring today may have another 20 years of investing to navigate. Twenty years ago, at midyear 1994, the DJIA stood around 3,625. So the DJIA has advanced 4.64 times in value, for an 8-percent annual rate of return. Incredibly, that stretch includes the 1999 tech stock bubble; Sept. 11, 2001; and the 2008 credit crisis now coined the Great Recession.
Yet a common norm in the investment industry would have these 65-year-old investors selling the majority of their stocks and investing in bonds to generate income and perceived safety. With decades ahead of them, a more rational approach would have retirees seeking long-term growth of capital, liquidating shares as needed to fund retirement needs.
Deep thinkers will take contrarian views that challenge conventional thought and the consensus, which can be quite wrong. An easy conclusion from the examples above is that fear of the stock market is harmful to your long-term wealth. Yet institutions and the public are still underinvested in stocks and choosing to take cover in fixed-rate investments or assets non-correlated to stocks.
The consensus is questioning the recent highs in the stock market, and yet just think how many more times we will hear “the market hit a new record high” in the coming decades.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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