Sunday, March 08, 2009
Annals of investing: Timing is nothing, and everything
The current issue of Barron's, Gene Epstein argues that the case for investing in stocks for the long term remains intact:
THIS YEAR MARKS THE 30TH ANNIVERSARY of a famous Business Week cover story "The Death of Equities." Along with those scary words, the magazine's Aug. 13, 1979, cover read, "How inflation is destroying the stock market." But starting around that time, investors could have beaten inflation quite handily by snapping up stocks and holding them for five or 10 years.
Buying the stock market at the close of 1979 would have yielded, after inflation, an average annual return of 7.3% over the next five years. An even higher five-year return of 9.47% could have been captured by going long at the end of 1978. The 10-year performance would have been healthier still, yielding 9.52% or 10.75%, depending on whether the investor bought at the close of '78 or '79.
With the stock market in the throes of yet another near-death experience, another rebirth could be in the offing. Five- and 10-year returns on stocks through year-end 2008 have run negative, and would have looked even worse at the lows of last week. But based on the historical record, performances like these bode well for the next five to 10 years.
THE HISTORICAL RECORD SHOWS that for 20- and 30- year periods, inflation-adjusted returns on stocks have never been negative. Over the 137 years from 1871 through 2008, returns after inflation for 20- and 30-year intervals have been consistently positive. Median returns over the 20-year intervals have been 6.85%, and for 30-year intervals, 6.23%.
With this consistently strong performance over long periods, it stands to reason that below-par returns over five- and 10-year intervals would tend to be followed by much better results over the subsequent five- and 10-year intervals. And in fact, the historical record shows that, following below-average returns over five and 10 years, subsequent periods of similar length do tend to perform better than average.
An investor whose retirement is drawing near might take heed: Investing in stocks today could help produce the cash you will need five or 10 years down the road.
The story is accompanied by a couple of useful graphs, the first showing that even taking the decline through 2008 into account stocks have generated returns better than Treasuries for the vast majority of 5 and 10 year periods since 1871...
...and that the chances they will do so are greater following harsh declines.
Point is, the odds are quite high, but not certain, that an investment in American stocks today will generate solid returns over the next five or ten years. If you are a subscriber and dig deeper into the linked article, you will see that this is generally true even if you buy at market tops and sell at the bottom, although obviously less so. So in this sense, timing the stock market is, well, not important.
The problem, of course, is that we do not live forever. Our lives follow a certain rhythm. If you are in your early sixties or already retired, your returns over the next ten years matter a lot less than the beating you took in the last six months. If you have a senior in high school and had planned to sell stocks to bridge the gap between aid and tuition, you are in a lot of pain right now. For individuals, timing is everything.
This, perhaps, will prove to be the great divide in this savage recession: Whether you are of an age or stage in life that makes this merely a setback that does not fundamentally alter the future you imagine, or whether it defines whether you can go to college at all or afford to retire when you had planned to do so.
8 Comments:
By 
, at
Sun Mar 08, 12:43:00 PM:
Personally, I'd take the bet that major indexes are more likely to drop 10% in the near-term than they are to go up 10%. A few individual stocks and sectors may move up, but not the market as whole.
I really believe Obama is managing to such an outcome. He wants 2010 to be a success ... following a really bad 2009.
Because of this, getting the timing right on when to jump into equities is important to your long-term results, unless you have a really long horizon. This is why so much money is on the sidelines.
A president that wanted to fix things in 2009 could propose a one-year capital gains holiday on investments in public equities ... it would help a lot, at minimal cost to the fisc. But Obama won't, certainly not in 2009.
Link
By 
MTF, at
Sun Mar 08, 01:04:00 PM:
Oh, I'd beat easily on a 10% decline. Heck, that could happen in the next month. Until the administration changes gears, and cuts spending and taxes, only bad news will come. And, I'd also bet on a long period of relative stagnation before equities broadly rebound.
But gains will come and the history of boom markets is that the gains come in short bursts and quickly. You can't predict when the market will explode upwards, but it will. For that reason alone you'd be silly not to be invested, if you can afford to be. So buy stocks with money you won't need for a long time to come, if you can, and forget about the money. Pretend it's gone. You'll wake up someday find it's grown by half. Just don't expect much in the short run.
By , at
Sun Mar 08, 01:10:00 PM:
MTF,
Your first paragraph says don't invest in 2009. Your second says you can't stay out of the market forever.
My point exactly, and I think it's by Obama's design. The Dems will claim credit for a 2010 market recovery.
Link
By MTF, at
Sun Mar 08, 01:19:00 PM:
My point is: don't try to time the market. It's a silly strategy. Invest in great businesses, watch them to make sure they maintain their dominance, and be patient. It will take time to profit, but profit you eventually will.
By SR, at
Sun Mar 08, 01:38:00 PM:
The "greening" of the energy sector, and the nationalizing of the health care sector is likely to add a lot of unnecessary dead weight to two previously hardy sectors of the US economy and the list of solid companies.
By , at
Sun Mar 08, 04:10:00 PM:
Invest when Congress is out of session. Empirically, it works.
-David
By , at
Sun Mar 08, 04:36:00 PM:
1Q09 quarterly reports will start coming out next month. That might not be too long to wait to get a clearer picture of a company's situation.
By , at
Wed Mar 11, 10:09:00 AM:
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