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Mar 3, 201411:41 AMFinancial Perspectives

with Michael Dubis, CFP

Why a long-term investment outlook is still important

(page 1 of 2)

When markets keep rising, we can forget why a long-term mindset is valuable. In a nutshell, investing over the long term is one of the best ways to minimize short-term equity risk exposures. Market cycles do exist, can be long, and are unpredictable, and if you’re not managing for them, they can have a significant impact — both good and bad — on your portfolio.

I personally define “short term” as meaning one to upwards of 10 years, although most investors define it as one to five years. There’s no wrong answer. I think it comes down to expectations of what could happen within your definition of “short term” and whether you’re comfortable with those risks. 

Equities and stocks are not only incredibly volatile in the short term, they can also experience negative returns for long periods of time. The concept of “stocks for the long term” assumes that investors can be highly confident that equities will outperform in the future because they have in the past.

I’m not so sure. Investors never know with a high degree of certainty what the future holds for stocks, nor can they be very certain what future volatility will be. This uncertainty is at the core of why stocks can or should offer investors higher rates of return: Because you don’t know! If the risk doesn’t happen, you get the return; but, if the risk does happen, you don’t get that return (and, in fact, you could lose money). 

So, yes, stocks have historically outperformed bonds over very long periods of time, and yes, because of the higher uncertainty stocks carry, they should offer investors a higher return. But stocks can and have lost significant value in short to intermediate periods of time, and since that can happen during a time when you may need the money, the long term needs to be clearly embedded in your mind. 

For example:

  • Bear markets and recessions have occurred in most developed nations about three times every 10 years.
  • U.S. stocks have gone more than a decade with performance less than or equal to that of bonds. 
  • Furthermore, over the past 200 years, U.S. stocks have declined as much as 90% in a single holding period. In 2008-09, many global stock indexes lost more than half of their value. 
  • It’s possible for entire countries or indexes never to recover their losses in one’s investment lifetime. Just look at Japan in 1989, or the 2000 Nasdaq tech bubble.


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About This Blog

It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' contribution through IB blogs will help you sift through the noise and give you some perspective. You can find his company online.

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