The next chart illustrates the Dow Jones performance when it is adjusted for the government’s measure of inflation, the questionable Consumer Price Index (CPI).

The next chart illustrates the performance of the Dow Jones when it is compared to a more stable measuring stick; gold.

To the average investor this insight should be devastating to say the least.  In the world of investing, ten years should be considered “long term” and investors should not be okay with this kind of performance. 

Conventional thought suggests that an investor can expect an 8% annual return from the broad stock market over the “long term”.  The following chart compares this expectation versus the reality.

Contrary to historical evidence many professionals have insisted that the market always rises at 8% per year over the “long term”.  Unfortunately this past decade was a tough learning experience for many investors as capital fled the stock market and entered the hard asset market. 

The point of this article is not to win an argument about Gold being a better investment than Stocks.  We do not favor one asset class over another asset class.  Instead we are trying to illustrate that markets are cyclical and not linear.  No market goes straight up or straight down.  There are times that it makes sense to invest more heavily in the general stock market and there are times that it makes sense to invest more heavily in hard assets.  Unfortunately the average investor has been led to believe that one investing strategy could be used regardless of market conditions.

From 2000 – 2010 the place to invest has been hard assets and during this time it was wise to limit exposure to the general stock market. 

These long term market trends tend to last a very long time and we expect this trend to continue into the next decade.  However, no market goes straight up or straight down.  We expect that there will be times that the US Stock market and even the US dollar will outperform gold and other commodities.  We expect that many investors will foolishly cash in their stocks and then buy into a frenzied hard asset market only to be disappointed when they once again miss the trend change.  Ultimately, we expect a parabolic, mega spike in precious metals that rivals the 2000 Nasdaq mania.  However, it is our opinion that this market mega blow off will happen many years down a very bumpy road. 

Going into 2010 we caution long time, hardened stock investors not to wait another decade to decide that commodities are a wise investment.  At the same time we caution long time, hardened commodities investors not to expect a straight up, one direction bull market.  Both of these investment views are likely a recipe for disappointment.

At investmentscore.com we use proprietary long term charts that help us identify long term market trends.  We then consult our weekly and daily charts to help us identify lower risk entry and exit points.  We try to avoid the distorting affects of floating currencies by comparing markets directly to one another.  To learn more and to sign up for our free newsletter please visit us at www.investmentscore.com.  We recognize the challenges of the coming decade but at the same time we are excited about the opportunities that will be presented.

November 27, 2009

Legal Disclaimer:

No content provided as part of the Investment Score Inc. information constitutes a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. None of the information providers, including the staff of Investment Score Inc. or their affiliates will advise you personally concerning the nature, potential, value or suitability or any particular security, portfolio of securities, transaction, investment strategy or other matter.  Investment Score Inc. its officers, directors, employees, affiliates, suppliers, advertisers and agents may or may not own precious metals investments at any given time. To the extent any of the content published as part of the Investment Score Inc. information may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.  Investment Score Inc. its officers, directors, employees, affiliates, suppliers, advertisers and agents are not responsible for any loses incurred from the opinions, comments, charts or information on this website, members pages, emails, phone conversations or any published material.  Investment Score Inc. does not claim any of the information provided is complete, absolute and/or exact.  Investment Score Inc. its officers, directors, employees, affiliates, suppliers, advertisers and agents are not qualified investment advisers.   It is recommended investors conduct their own due diligence on any investment including seeking professional advice from a certified investment adviser before entering into any transaction.  The performance data is supplied by sources believed to be reliable, that the calculations herein are made using such data, and that such calculations are not guaranteed by these sources, the information providers, or any other person or entity, and may not be complete.   From time to time, reference may be made in our information materials to prior articles and opinions we have provided.   These references may be selective, may reference only a portion of an article or recommendation, and are likely not to be current.  As markets change continuously, previously provided information and data may not be current and should not be relied upon.

-- Posted Friday, 27 November 2009 | Digg This Article