Anyone who has known us for very long knows that we routinely advise against an investment strategy based on predicting where the market is going to go next – up, down or sideways. This is not just our opinion. It’s based on decades of academic inquiry that shows us that prices adjust when unexpected events alter the market’s view of the future. This tends to foil our ability to forecast future pricing.
Figure 1: 1926–2013 monthly growth of $1
This elegant little chart says a lot with few words.
1 In US dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. US Small Cap Index is the CRSP 6–10 Index; US Market Index is the CRSP 1–10 Index; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Bonds, T-bills, and inflation data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
- Long-run expected growth versus short-term jitters. Most of us remember those sickening downward jolts in 2007-2009, tempting many to dump their stocks in a fire sale. Viewed in a wider perspective, we can see the market ultimately continued to reward those who remained invested, awaiting continued growth.
- The role of diversification. The greater the expected market growth, the more jittery the ride has been along the way. By building your portfolio with a mixture of asset classes, you can seek expected market returns, but with a safety net to catch you when the higher-flying markets take a tumble.
Even the long-term future is not guaranteed; no illustration we know of can peer ahead with certainty. But if the choice is between reacting to current headline news versus heeding more than eight decades of evidence regarding market growth, our bets remain on the patient, long-term, globally diversified investor.
Sage Serendipity: If you ever feel like a cog in the grander wheel of the stock markets, remember that they are nothing more than the sum total of every participant – including you. Like this Budweiser Clydesdale Donkey, all you have to do to belong, is believe that you do.