The recent bubbles and crashes of the stock market, real estate, and securitized debt obligations have led me to the following observation: estimates of the future are often grounded in the present. For example, when real estate prices increased between 50 to 150% from 2003 to 2005 in some cities, people projected those price increases past 2005, and acted accordingly. The same is probably true for the 18% return of the S&P from 1990 to 2000. Unfortunately, this error in estimating the future may cause major issues in assessing risk for the following reasons:
To help avoid incorrectly assessing risk, a concept I like to use is regression to the mean, which proposes that returns will tend deliver the long term average, in the absence of an causal change. In the case of the stock market, with a long term return of 10%, I believe the last nine years may indicate that the stock market is due for a new upward trend. However, for housing , with a long term return of about 6%, I believe there may be several more years of declines or no increases for some cities, especially ones that had large returns in 2003-2005.
For more on New Beginnings, check back every Sunday for a new segment.
This is not financial, real estate or investment advice. Please consult a professional advisor.
Copyright © 2008 Achievement Catalyst, LLC
November Goals Update
2 weeks ago
No comments:
Post a Comment