Wednesday, March 25, 2009

'Stocks are best for the long term'

That's how stocks are sold to the public. In the long-term, it is said, stocks outperform other assets. The trouble with this statement is that the long-term can be much too long- longer than one's life span. Secondly, in the active period of one's life, one can find that stocks have done worse or no better than other assets. I have written about this, citing various sources of data. An article in the FT revisits this theme:

Anyone who started saving 40 years ago, when the postwar “baby boom” generation was just joining the workforce, has found that stocks have performed no better than 20-year government bonds since then, a forthcoming article by Robert Arnott for the Journal of Indexes shows......To find a period that does produce an outperformance requires a span reaching back a lot further. The 2009 Credit Suisse Global Investment Returns Yearbook shows that since 1900 US stocks have averaged an annual real return of 6 per cent, compared with 2.1 per cent for bonds – while in the UK, equities have beaten gilts with a return of 5.1 per cent against 1.4 per cent. The problem is that they can perform worse than bonds for periods longer than a human working lifetime.

..Last year, most equity mutual funds failed to beat their benchmark indices, even though their managers had the freedom to move into cash and to pick stocks. Mr Malkiel points out that of the 14 funds that had beaten the market in the nine years to 2008, only one did so last year. Both efficient-markets and behavioural economists say it is better just to match the index, with a tracking fund, and avoid the fees incurred in unsuccessful attempts to beat the market.


Anonymous said...

In the long term everybody is dead and so stocks are best for the dead.

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