Ignore the Last Ten Years

 As far as the financial debate goes between buying vs renting, it’s all about assumptions.Anyone who bought in the last 10 years in the various real estate hotspots (in Canada at least) will have done well and can use that as proof that home ownership is a great investment.However, nobody knows how much houses will go up in the future.The reality is that if they only appreciate by their long term increase of inflation + 1, then they are not such a great investment.

Dividend stocks are the same thing – they have done so well over the last ten years that everyone (including myself) is buying them now convinced that we can’t lose with them.Again the reality is that if the dividend increases over the next 10 years are more in line with their long term average of about 5% and the stocks are currently priced for more than that, the stocks won’t be such a great investment.Admittedly not a bad investment either, but anyone trying to do a Derek Foster starting now is almost sure to be disappointed.

The fact is that a lot of investments such as real estate and dividend stocks tend to do at least reasonably well over the long term in that they tend to go up in value.The problem is that we tend to think of “good investments” in relative terms so they are investments that do better than the average investment.Over the long haul, “investing” in your house probably won’t do as well as investing in the stock market and likewise, Canadian dividend stocks probably won’t outperform the market over the long haul, but that is real hard to believe given their history over the last ten years.

And finally a quote from Bernstein who is referring to the tendency of investors to look at recent history and conclude that it will continue forever, “Ignore the last ten years!”.

9 replies on “Ignore the Last Ten Years”

A few comments here:

1.Even if it is true (where did you obtain this information?) that the long term average dividend increases for the universe of dividend stocks have been 5%; that’s only half the story when referring to the total return of stocks long term. If I am an investor I care about the worth of my piece of paper not just what that paper is paying me annually.

2. I totally agree with your point about real estate. The recent past often clouds the mind. You must look long term and across geographies to get and accurate picture. Demographics must also be considered. What is the demand for home ownership now vs. last year and vs. 20 years ago – why is this the case…interest rates..demographics..etc.

3. I think using the term ‘Dividend Stocks’ to refer to a general asset is not accurate. For example companies like General Electric and Johnson and Johnson have been raising their dividend aggressively for much, much longer than 10 years. Proving that dividend increases have been excessive in the last 10 years as compared with a length of time before that would be a task in itself where one would have to look at dividend payers from Canada, U.S., and globally across all sectors.

4. Your statement ‘Canadian dividend stocks probably won’t outperform the market over the long haul’….sounds like you are making a bet on that. Who’s to say that they aren’t in the middle of a long 3o year run where they outperform the market. By the way, what’s ‘the market’?

I think that given the increasingly volatile and interdependent nature of world markets in equities, any prediction for the future based on the past 10 years (or any other period) is risky. A lot of Americans like to point to historical data about the S&P 500 since inception to show it returns 10% – great, but there were depressions, wars, recoveries, huge tax code revisions, etc. buried in there that may never happen again.

I sometimes wonder if the obsession with ‘beating’ the market is messing people up. I am pretty happy with my returns – I’m on track to retire when I plan to (although I would like to do it earlier) and if my portfolio keeps growing at its moderate pace I’ll be fine. I may not beat the market, but then again I’m not a professional investor. My goal is to meet my goals, not to continually outperform gigantic mutual funds with full-time custodians.

Good point about everything being interconnected.

Regarding THE PAST – It’s one of those things though where everyone will always tell you that the past does not matter, but let’s face it…what else do we really have? If for the past 40 years dividend stocks had returned 2% per year, I wouldn’t be invested in them. When you are analyzing mutual funds do you ever glance at past performance? It may not be the deciding factor, but it needs to be strong.

What makes sense to me is that as long as the earth turns, companies will have a strong incentive to make more and more money every year. I think involving myself in that system by owning small parts of good companies is wise, since we have this free market, share ownership society. Short of owning my own small business, it seems like a logical way to grow money. It has worked in the past and will work in the future.

MG – I got the 5% figure which admittedly is an approximation from the FWF in a thread I posted about my leveraged plan. It’s also mentioned in Four Pillars although I can’t remember the exact figure. This doesn’t mean it’s going to be accurate over the next 20-30 years but it’s not a bad assumption which is why I used a 5% dividend growth assumption in my leveraged plan.

2 we agree

3 Dividend stocks – I agree I am using this term very loosely – I don’t have an exact definition but the Mergent’s Dividend Achievers list is exactly the kind of stock I’m referring to.

4 I hope you don’t expect me to start using specifics on this site! Way too much work!
I said that I think they “probably” won’t outperform the market – I don’t know either way but I think it’s unlikely – I’m not suggesting they will underperform the market either.

By “market” I mean the TSX composite index with respect to Canadian stocks and the S&P500 for USA stocks.

To clarify #4 – I believe in the efficient market hypothesis so when a certain asset class outperforms for a period of time, it’s not unreasonable to think that this class could underperform in the future. The Canadian banks are a good example – they are probably among the best investments over the last 10 years. This run could go for another 30 years or it might not, but eventually everything returns to the mean.


BB – good point about the 10% return – one thing I’ve read is that number does not include any kind of transaction fees so if you are a mutual fund investor for example you would at a minimum need to deduct the management fee from the expected rate of 10%.

I agree about not beating the market – I have no illusions about doing that. I’m not saying it can’t be done but I feel it’s a safer bet to stick with the market which is why a good portion of my portfolio will be passive (soon) etfs.


MG – having seen your portfolio and investment plans I think you’re definitely on the right track.


Funny thing is, this post was intended to be a ‘light’ reading before the weekend 🙂


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