Recently, Equius Partners published an interesting piece, which was picked up by The Big Picture. I’ve posted it in it’s entirety below, but for the moment, we have a few issues that I need to get off our chest. First, here’s the chart (scroll to page 2):
The entire point of the chart is to make the argument that over extended periods of time, long-term stock returns tend to converge at positive levels. This is unarguably true.
However, while true, this chart minimizes the massive distortions that small annualized changes in performance can have when compounded over very long periods of time. For example, the chart shows that from 1929-1971 the compound annual return was 8.8%, while the same amount of time, from 1931-1973 returned 8.3%. That paltry difference of .5% compounded over 42 years yields a final portfolio value difference of over 21% (under very basic assumptions.) More realistic assumptions would have included:
- The chart doesn’t take into account the fact that retirees have the most at stake during the last 10 years leading up to retirement and the first 10 years in retirement.
- The chart doesn’t take into account the cash flow effects of people contributing varying levels of money to varying types of investment accounts over time.
- The chart doesn’t take into account the fact that the emotional time horizon for most investors is closer to 3-4 years, not 86 years.
This last point is an important one that most investors don’t often consider. To wit, we’ve never met a single investor – even amongst those who self-identify as “true-believers-in-buy-and-hold” – who consider their investment time horizon to be much more than 10-20 years. And even those who self identify along those lines often behave as we’ve outlined above, changing strategies after a few years of disappointing results.
The point of the chart is to persuade you, via an endless green pasture of positive long-term returns, that you should adopt a strategic long-term approach to equity investing, and hold on for the ride. But this is of questionable merit because if the data has no consideration the reality actual investors face, how are we to buy into the argument in general?
Perhaps on an even bigger philosophical scale, we also take exception with the entire notion of long-term investing applies to asset classes themselves. It doesn’t. The notion of investing for the long term ought to apply at the strategy level, not the investment level. In other words, you should devote your life as an investor to identifying not the asset classes that will thrive over the long-term, but the strategies which will identify the asset classes that will thrive. This is what we believe in.
Call it the “teach a man to fish” approach to investing.
And if you’d rather learn how to fish than be given a fish, we have something that you need to read right now.