The world of music lost a great one recently.
The musical artist known as Prince (real name Prince Rogers Nelson) left an incredible body of music after becoming an international superstar in the early 1980’s. His live performances were legendary and, specifically, his Super Bowl half-time performance in 2007 will not be forgotten anytime soon. He produced a ton of memorable music and collected seven Grammy awards along the way. In the introduction to our favorite Prince song, “Let’s Go Crazy,” he laments the difficulty of daily life:
We are gathered here today
To get through this thing called "life"
Electric word, life
It means forever and that's a mighty long time
But I'm here to tell you
There's something else
A world of never ending happiness
You can always see the sun, day or night
So when you call up that shrink in Beverly Hills
You know the one, Dr. Everything'll-Be-Alright
Instead of asking him how much of your time is left
Ask him how much of your mind, baby
Cause in this life
Things are much harder than in the afterworld
In this life
You're on your own
And if the elevator tries to bring you down
Go crazy and punch a higher floor!
While it is interesting that he died in an elevator, you might be asking what in the world does this have to do with investing? Excellent question.
In our last two Market Perspectives – “On Potential” and “On the Triumph of a Long-Term Perspective” - we too have been lamenting, but, in our case, it is the difficulty in dealing with the economic and investment future that is more subdued than we have grown accustomed to over the last few decades. As if to pile onto our grief, the global management consulting firm McKinsey & Company recently published a dour study estimating the future returns of the broad equity and fixed income asset classes entitled “Diminishing Return: Why Investors May Need to Lower Their Expectations.” Their conclusions are summed up in the following graphic from the study:
Their conclusions jive with the subdued outlook we have mentioned above and discussed recently. Focusing on their U.S. equity outlook, it is interesting that they are only expecting somewhere between 4.0 and 6.5% average return over the next 20 years compared to a 100-year average of 6.5% and an almost 8% return over the last 30 years. The latter time frame includes a period of long, sideways action between 2000 and 2013. To better understand how investors have experienced the 6.5% average annual return in U.S. equities over the last 100 years, we present the chart below:
U.S. equities have a tendency to move in a series of broad advances followed by somewhat long, multi-year plateaus, almost like a staircase. Looking at the most recent “step” we are once again going to take the optimistic perspective and say that perhaps the U.S. equity market may have already started a new broad advance away from the 2000 to 2013 plateau. We can't help ourselves when it comes to deciding between optimistic vs. pessimistic outlooks, as we will always take the optimistic view! For us, optimism is the only realism because an optimistic outlook is the only world view that squares with the facts and the historical record ... the market has gone up over time!
Similar to Prince's optimistic outlook in “Let's go Crazy,” we can’t help but think the market may at some point really “go crazy and punch a higher floor!”
Song lyrics obtained from the public search engine, Google. This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. The opinions expressed do not necessarily reflect those of author and are subject to change without notice. Past performance is not indicative of future results. Diversification cannot assure profit or guarantee against loss. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. Reference to an index does not imply that a portfolio will achieve return, volatility, or other results similar to an index. Performance of an index is not illustrative of any account, portfolio or strategy managed by Sequoia Financial Group. It is not possible to invest directly in an index.