The Long-Term Investment Myth

George Rebane

We’ve all been advised to invest for the long term – buy quality and just hang on to it – for best results.  But all long term investments have to take buying power (aka inflation) into account.  The astute investor knows that inflation is a government assets tax and acts accordingly.  If we look at the inflation adjusted performance of quality stocks, as in the Dow Industrials, then most of us are in for a surprise.  The chart below (from Chart-of-the-Day) was sent by a correspondent.  (This is a semilog chart on which all equal vertical distances represent the same *percentage* gains or losses.)

You can play with the numbers yourself, but one thing becomes clear right away.  Since the beginning of the Great Depression in 1929, the Dow has now less than doubled.  This gives an effective annual yield of about 0.9% for the 80-year long term.  But you say that no one has an investment horizon that long, and you would be right.  So what would you pick as a more reasonable investment horizon – 10, 20, 30 years?  Well, it doesn’t take a rocket scientist see from the chart that your annual return for such periods depends greatly on when you bought in and when you decided (or life decided for you) to sell.

The main point here is that blind buy-and-hold strategies have an oversold reputation.  And this explains why all the brokerage services, newsletter gurus, and technical analysts continue to make money.  They claim to help you buy low and sell high – in short, they help you do what you’re not supposed to do, time the market.  As you can see, market timing is not something to casually toss out the window.  By the way, had you sold your 80-year investment when the Dow was recently at 14,000+, your annual return would have been about 1.3% - whoopee!

For an alternative investment strategy, which many of us today wish we would have practiced, consult the now-famous trader and math professor Nassim Nicholas Taleb in his ascerbic and fascinating to read essays Fooled by Randomness and The Black Swan. 

Comments

[Forex brokerage]

I must agree with you on this matter- long term investments aren't always calculated right, and due to the fact they are long term it is much harder some times to realize what the final outcome will really be. I heard that one of the best long term investments is art now days, but it is also a tricky business.