>In this linked to Column by Paul Farrell he tells you to sell all risk assets because Wall Street is out to get you and you can’t beat them. The irony is that much of what he writes about Wall Street is correct, but his conclusions are wrong. Investors very well may lose 20% by 2020 adjusted for inflation and Wall Street will have something to do with it – however it will have more to do with valuations. Depending on who you talk to the market was trading between 30 and 43 times trailing earnings by January of 2000 – a number with no historical precedent (not even a close one). We could have had ten boom years and still ended with a negative return do to valuations being to high. If there is one thing this past financial crisis has taught us, it is that Valuation matters and what is required is a Margin of Safety – these are not new concepts, just forgotten concepts (and often ignored concepts). Stocks are nearly as overvalued as they were in 2000, yet on a historical basis still appear over-valued given the risks that are out there. Stocks are likely to have a positive return this decade, but not by much (and of course it will vary by asset class), yet many investors are likely to lose – likely because of many of the thing Farrell mentions. The main point is that while what Farrell says may be true, its not the primary reason for a negative decade – Valuation is.
Scott Dauenhauer CFP, MSFP, AIF