Thursday, July 20, 2006

Stocks for the long haul?

There's an excellent article up on Financialsense.com entitled, "Second Verse, Same As the First". Written by Doug Wakefield and Ben Hill, the piece examines the "buy and hold" mantra that has dominated public thinking regarding the stock market.

The fantastic hypothetical returns that were dangled in front of investors to illustrate the advantage of purchasing stocks and index/mutual funds were misleading, to say the least.

Ibbotson studies and books such as Dow 36,000 sought to convince investors that wealth could be attained through a disciplined program of buying and holding stocks over long time horizons. Only problem is that they seemed to have glossed over a few important points, namely: investors who are not as risk-averse as the models suggest, survivorship bias in the constructed indexes, effects of inflation on investments, etc.

I think the authors did a great job of addressing some of the ridiculous assumptions underlying scenarios that purported to show how much investors could have made with a buy-and-hold approach. Give the aritcle a look, and while you're at it, have a look at this similarly themed piece from 1997 entitled, "Beware of the investment pundits".

Further analysis of the Ibbotson studies and return projections can be found in this 2005 article, "Waiting for Average", by Ed Easterling. Great info for anyone who's been indundated with "stocks for the long term" hype.