Most people don’t start saving, statistically, until after 35. That significantly reduces the positive effect of long term growth on their savings, as the 30 year period is well within a given boom/bust cycle. Invest at the ‘wrong’ time and you could see a loss in earnings as opposed to steady growth. The market is just too volatile to benefit such short term investments.
Sure, I admit to being very conservative in my investment advice, but my returns speak for themselves.
In the suburb and neighborhood I was in, houses had historically made that kind of appreciation for many, many years, in good times and bad.
That may be true over a short term, such as 10 years, but it’s not true over any 30 year period in the modern era. There’s no 30 year period where you wouldn’t have been considerably better off investing a fixed annual amount in equities as opposed to more conservative investments. I’m actually not sure it’s even true over any 10 year period, which is a relatively long period of time in investment terms.
There’s definitely legitimate reasons for preferring more conservative investment, such as uncertain investment duration (if you might need to withdraw the money earlier than anticipated), but you’re definitely sacrificing long-term ROI by not investing in equities.
Desslock - what you say is at best misleading.
I haven’t looked at the data recently, but I believe it is correct to say that in well recorded US stock history, there are no 30 year periods where bonds outperform stocks, there are a number of 10 year periods, and I think with regard to 20 year periods, there are some edge cases (I don’t remember the specifics - and there are different ways of doing calculations).
Be that as it may, the implication that such a simplistic presentation of data makes, to a lay reader, is misleading.
First, there isn’t ALL that much well-recorded US stock history. Things get very fuzzy before about 1871. So we’ve only got about 138 years of good data. That sounds like a lot. In fact, if you analyze 20 year periods starting on a given day of the year, you can have 119 such periods, which, again, sounds like a lot. But these are overlapping periods, which means that statistically, they’re not nearly as useful as non-overlapping periods. Data for 1900-1920 is 95% the same as data for 1901-1921. So really, there are only a hair 6 fully unique 20 year periods within this time frame (almost 7). That’s a very small sample size to draw conclusions from.
Moreover, if you’re trying to draw useful conclusions for investing TODAY, things get worse. Because the market conditions today do not match the market conditions over the periods you’d be studying. Until recently, by most good measures of fundamental value, the market was priced higher than it has been at most times in the past. (The recent market swoon may have changed this.) Anyways, if the market is at a ‘normalized’ P/E of 20, and the average for the historic time frame is 10 or 12 or 15, then using historic data as a guide to the future is going to be dicey. (FWIW, I’m not saying that the normalized P/E is currently 20, and how one normalizes P/E, or even IF one should normalize P/E and/or use other valuation measures, is a deep topic - perhaps another day).
Finally, the US stock market did unusually well in the 20th century (the time frame that most historical data that people use falls into). Other markets around the world did not do as well. See Dimson, et al’s Triumph of the Optimists for details.
Even in recent years, there are reference points that are sobering. I was in college from '87-'91, in the biz program from '89-'91. That was the time frame during and just after the peak of Japan-o-mania. The value of the Japanese stock market approached (possibly surpassed - I forget) the value of the US stock market. A ‘global’ investor indexing to world-wide market weights would have had a large investment in the Japanese market.
The Nikkei closed at 38,915.87 on December 29, 1989. Now, over 18 years later, it’s at 12,613.46, off about 67.6% over that very long time span. Buy and hold investors would have had their blow softened a bit by dividends (though for most of that period Japanese dividend yields were very low). I’m not sure what the impact of currency rate changes (Yen vs. Dollar) would have had for a US investor. In any case, it’s been a very ugly place to be an equity holder for a very long time. Interestingly, I think Japan may be poised to do well going forward, but that, too is another subject.
Bottom line - I think equities are currently priced to outreturn bonds (though at higher risk). But it’s far from the absolute slam dunk that some think it is. Furthermore, a diversified portfolio (equity from around the world, probably some bonds and other stuff too) has a much better chance of avoiding major long-term losses, IMO.
I am not a financial advisor - invest at your own risk - yada yada…
It’s not so much a mystery that equity outperforms bonds (that’s to be expected, as stocks are riskier than bonds, so investors demand a return premium to hold stocks), but rather, that equity has, at least in the US over the last 80 or so years, outperformed bonds by so MUCH.
Interesting, since I didn’t see anywhere that you disagreed with anything I stated.
But to be clear, so nobody gets the bright idea to lose their shirt by throwing all their savings into a bunch of stocks tomorrow – we’re talking about investing in equities as part of a well-balanced, diverse portfolio that sufficently aggregates risk. Like both of us have said - see a financial advisor to help design a portfolio that best suits your needs.
But based upon historical performance to date, as I’ve indicated, any prudent investment strategy should appropriately include equities. These bank GICs are only giving a 1 or 2% return, which is a very poor use of investment capital for most people.
Desslock, sorry, I wasn’t meaning to attack you, though my phrasing could certainly have been better. I just thought some folks who don’t know much about the markets could read your post and come away thinking that stocks are basically a sure thing against bonds over moderately long time frames, which I don’t think is the case.
I completely agree with your point though that just about anyone in the demographics likely to be reading this forum (say, ages 20-50) should very likely have a significant share of their long term investment portfolio in stocks.
Mordrak,
I don’t think this has come up yet, but you are a genius. No kidding.
There is an entire school of thought that suggests that stocks should be valued solely according to the net present value of future dividends.
P.S. There are also other schools of thought.
You overshot by a few miles, but thanks for the compliment.
That’s fine, it can derail into investment advice. :) My questions were more general.
Thanks for your summary!
Why not? Think big! You may own some stock someday if that’s what you want to do and owning stock in general (as we’ve been discussing) is a good thing:)
Hehe. I need to work on my ninja skillz. Oh, my comment wasn’t meant to disparage investing. Participating in investing if you can definitely seems like a good thing.