It is believed that it will be very difficult for many investors to come to terms, and that returns will be quite modest into the foreseeable future in stocks. Why? Because according to the Wall Street Journal, more than half of all stock investors began investing during the 1990s, a time of unprecedented stock market strength. From 1995 through 1999, the Dow industrials averaged a gain of 24.7% a year and the NASDAQ composite averaged a 41.9% annual gain. Most investors have wrongly come to view such enormous gains as normal. The indexes have never before been able to sustain gains like that and, we doubt, they ever will in most of our lifetimes. Many would argue that recent dramatic downfalls in markets are due to events of 9/11. However, we have also seen that fall of giants on accounts of accounting frauds have been the results of falling off their own weights.
Many investors have embraced the concept of stocks doing well over the long term. Yes, stocks do well over the long term. However, a closer evaluation of the stock markets performance shows most of the good returns are delivered during super bull markets, like the one that late 1990s! A closer look at the stock market's historical performance shows long periods of stagnation. Historical trends shows that the market peaked in 1929 during the Great Depression, it wasn't until 1954, 25 years later, which the market recovered to its 1929 highs.
For many investors who just started investing in the '90s and/or who are not old enough to remember the long-term performance of the stock market, it is now time to tone down their stock market expectations.
Based on the recent events and other historical performance trends it is suggested that investments in stock market are dangerous unless diversified with some non-stock market areas. It is absolutely critical for investors to diversify their portfolios with non-correlated investments to the stock market that can potentially capitalize in a sideway, bull or bear stock market environment
In addition to many aftermath of 9/11 and prolonged market bubbles, there are two new developments in the making, which can have quite negative consequences for the stock market, namely the weakening of the U.S. dollar and a significant pullback of foreign investment in the U.S.
We need to ask ourselves a question, whose answer we'll probably be very surprised with: What percentage of dollars have foreigners invested in the stock market over the past few years as compared to all U.S. mutual funds? If our guess was 25% or even 50%, we were incorrect. The answer according to The Wall Street Journal is closer to 95%
It should not take a genius to see why foreigners could continue to avoid the U.S. stock market. U.S. stocks are consistently down so far this...