Tha Fallacy of "Stocks for The Long Run"

07/15/2011 Share 0 comments

Recently, two professors, Lubos Pastor of the University of Chicago Booth School of Business and Robert F. Stambaugh of Wharton, published a paper Are Stocks Really Less Volatile in the Long Run? in the Journal of Finance. In the paper, they made dispute to the notion "Stocks for the long run" that was popularized by another Wharton professor Jeremy Siegel. Here are some key points cited by Marketwatch.com's Howard Gold from his interviews with the authors:

• There have been periods in which stocks underperformed [Treasury] bonds and bills over 30 years, [and] 40-year periods in which stocks barely [outperformed] bonds.
• Even with 200 years of stock data (Dow Jones Industrial Index (DJI) and S&P 500 (SPY))  supporting Siegel's claim, the U.S. faces a lot of uncertainty. The past 200 years have been very kind to the U.S., [but] there's some probability you might lose a war. There's some probability you might have a financial meltdown. There's no guarantee we're going to bounce back.

As what we stated in our recent newsletter, the intuition behind holding U.S. stocks for a long run is that if you are certain that in the long run, the U.S. economy will be resilient and prosperous. The problem here is what it means for 'the long run'. Is that 100 or 200 years? Or is that 10 or 20 years? For the very very long run, in theory, this author personally believes that the U.S. political and economic systems are still the best among the world and thus it is highly possible for the economy to do well. But for the coming 10 or 20 years?

For an average person, 10 or 20 years is a long time. In 10 or 20 years, our children will graduate from college, we will retire or might have enjoyed our retirement for a while (assuming we properly manage our health and finance), ... etc.. For such a "long term", it is even more important to take care of your own retirement portfolios by using the right strategies.

Fortunately, for such a 10 or 20 year long term, it is remarkably accurate to predict stock returns. Interested readers should read John Hussman's weekly commentaries. In his commentaries, Hussman regularly explained the 10 year S&P 500 returns. Other good materials to read include GMO's 7 year asset class forcast and Robert Shiller's Cyclically Adjusted Price Earning (CAPE). All of the above can be some enjoyable weekend readings.

Symbols: SPY, DJI, Retirement Investing