Once upon a time investors had rules: Buy and hold. Buy what you know. Buy blue chips. This was how you matched the market's historical returns of 11 percent a year.
Only 11 percent?
As the market spent the last half of the '90s spiraling upward, the traditional wisdom was shouted down. "The business cycle has been abolished!" cried the apostles of the New Economy. "Day trading works!" they said. "Don't ask if companies make money!" You don't get it, was the message to naysayers. The Internet has changed everything, and you don't get it.
The new conventional wisdom held up longer than anyone had any right to expect. For five straight years, from 1995 to 1999, the Standard & Poor's 500 Index enjoyed returns greater than 20 percent. The "tech-heavy" Nasdaq saw returns of more than 80 percent in 1999 alone.
Then came 2000, which saw the start of what may become one of the tougher bear markets in U.S. history. The downturn has accelerated this year, and now, according to the broadest measure, the stock market is down 28 percent from its high, with the Nasdaq down a whopping 63 percent despite reducing its technocentricity.
As we emerge from technotopia, we have a right to feel disoriented. Where are we? What went wrong? When are we getting our money back? And most of all: can it be that some of the old rules were right after all?
These aren't the kinds of questions to which prudent investors should be seeking easy answers. The ability of anyone to call which way the market is going over the short term--short being defined as any period less than five years--is pretty bad.
However, if you wanted an answer as to when money is going to be back in our collective pockets, one way to take a stab at it would be to consider history. Over the past 75 years, the annualized return of U.S. stocks has been about 11 percent, and if you're a bit of a stock connoisseur, you've seen that number often quoted as the expected return of stocks over the long term. At an 11 percent rate of return, compounded annually, the Nasdaq would return to its March 2000 high of 5048 in 2010. But who says we can expect 11 percent any time soon?
At the height of the bull market, intoxicated by New Economy fumes, we embraced expectations well beyond history's already generous rewards. A Paine-Webber-Gallup survey in December 1999 showed that the average investor expected 19 percent annual returns over the coming decade.
That was completely unreasonable. …