Good, contrarian piece in the current Economist on the equity market outlook for 2005 and beyond. Contrary to received wisdom, even long-term investing can be perilous, especially when people become convinced that long-term investing isn’t risky:
History has no doubt helped investors to live with their losses since the equity bubble burst in 2000. But a lot depends on how long the long term is. In a book in 2002, “Triumph of the Optimists“, Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School found that in 13 of the 16 countries studied, shares did worse than cash in the bank in at least one 20-year period in the 20th century. Over ten-year periods, negative real returns on equities were not that uncommon. An investor buying American shares in 1964 and selling in 1974 would have made a real loss of 35%. [emphasis added]
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Indeed, long term investment can be risky…but it doesn’t have to be so!
Long term investments are often brought into a portfolio to service the client at a given time in their future – their retirement, or to meet a final mortgage payment for example – but the trouble is, when it comes to long term investments most people fail to remain active enough in their management and awareness of performance…
That and the fact that, as you so rightly put it, many people become convinced that long-term investing isn’t risky add up to financial disappointments and failures.
However, some of the risk can be removed with active management and proactive response to changes in the given market surely?
Also an unspoken truth is that hardly anyone stays invested in one instrument for the long run, with the exception maybe of a ten year note. Do you really know anyone who has held a particular stock (and I mean the original purchase, not a rotation in and out of the equity) over a ten year period? I doubt you will find anyone who can make such a claim.
Long term statistics are interesting but not very useful as hardly anyone has the stomach to adhere to a long term plan. It is also worth noting that many long term stats are poisoned by the fact that many datasets do not go earlier than 1980, so they really only capture one long huge bull market. Take the data all the way back to 1920 or so and you really see longer cycles at work. I suspect the reasoning is limiting long-term datasets to 1980 forward is to keep dangerous but useful information about protracted bear markets away from prospective marks.