Search This Blog

Wednesday, May 08, 2013

Investment Sense

Does investing in the stock market today make sense?

Let's do the math. According to the best fundamental models for the S&P 500 Index, we should see that index gain about 3.2% over the next ten years. Not per annum—3.2% total for the next decade.

Over that same ten-year period, the Federal Reserve hopes to generate inflation of 21% (2% per year, compounded for ten years).

Thus, anyone buying the S&P 500 Index here expects to make 3.2% - 21% = -17.8%. That's right, buying stocks here means investors expect to lose almost 18% over the next decade after inflation. Moreover, after pocketing a nominal return of 3.2%, they will have to pay some of that out to the US Government in terms of capital gains taxes.

Then, there's that little matter of a crash to contend with.