There is a recurring myth among investors that says if you invest in public in a sufficiently long period, it is almost impossible to lose your money.
We are dedicated to finance business projects start-ups "usually" discounted "investments with rates above 20% know why on our skin are as random as the previous statements.
In fact, the author James Glassman wrote in the Wall Street Journal recently that s i invest in blue chip stock in securities in a period sufficiently long as 10 years, chances are your annual return is weighted by above products as "bonds", ie obligations (state, corporate, etc.) and taking up a similar risk.
IT'S ALL ABOUT TIMING
Sergey Zaks James K. Glassman, the co-author of "Dow 36,000," created a minor controversy recently by suggesting That, while Being wrong about the Dow's future Growth, I WAS right about the fact-in the long run That Are stocks not risky. As he put it in his recent op-ed article in The Wall Street Journal , “For most periods of 10 years or more, shares of U.S. companies produced far greater gains than bonds, at much the same risk.” In his WSJ column Jason Zweig critiqued this statement but didn’t provide any numbers to prove his point. The issue of whether the stock market is risky in the long run is a very important one but fortunately any investor with the access to the Yahoo Finance site and Excel can assess it empirically – and it’s a pretty fascinating exercise.
Ten years sounds like a reasonable approximation of the “long run.” While many investors keep their money in stocks for much longer periods, we can imagine many situations when circumstances require a person to withdraw funds after 10 years. Yahoo provides data for the S&P 500 going back to January of 1950, an ample amount of time to work out our analysis.
We used the level of the index fully aware that it doesn’t include dividends. While skewing absolute numbers, this does not directly affect volatility. (A side note: historically, the average dividend yield from January 1950 to February of 2011 was approximately 3.4%. Since 1980 it was 2.8%, and in the last 10 years it was 1.8%. Data courtesy of Standard and Poor’s, Robert Shiller and Aswath Damodaran of Stern School of Business).
In our analysis we used monthly data. As the Yahoo tables start on January of 1950, the first calculated data point for the 10-year return is January 1960. From that point on and to February 2011 we calculated 614 data point.
What is immediately observable is the tremendous variability of results. While the average annualized 10-year return for the period was 7.26%, the maximum return was 16.75, reached in August of 2000, and the minimum was a negative 5.08% - that unfortunate record was set just two years ago in February of 2009.
The average investor would not doubt the variability of monthly market returns: he or she would accept their unpredictability. The average annualized returns on a ten-year investment are even more erratic. In formal terms, the standard deviation of monthly returns for the period from January 1950 to February 2011 is 4.20%. The standard deviation of the average annual 10-year returns is 4.84%.
To put it differently, if you were lucky enough to invest $100,000 in August 1990, ten years later you would have approximately $470,000 from the growth of the general price level of the index, plus about $100,000 extra from received and re-invested dividends for a grand total of about $570,000 (the average dividend yield for the decade was about 2.27%).
If, on the other hand, you were unfortunate enough to invest your money in February of 1999, 10 years later you would have about 59,000, plus about $20,000 in dividends, direct and reinvested, for a grand total of about $71,000 (the average dividend yield in the decade starting 1999 was approximately 1.76%).
The unlucky fellow ended up with about 1/8th of the amount of the lucky one.
These results are striking and lead to several conclusions. First of all, as we can see, stocks are risky, even in the long run (or at least in the medium-long run).
This is an obvious and expected result. But another fact, usually less discussed, is that individual results depend on the timing of the investment much more than on any investment skill!
The difference between a good (or, to use our preferred label, lucky) investor and a bad one (or an unlucky one), when compared during the same time frame, is usually measured by a couple of percentage points: just take a look at the annual results of thousands of mutual funds investing in the US stock market.
The difference would be significant if the spread among good and bad investors was consistent years after year; it practically never is. On the other hand, if we take into account different entry and exit time points, the variation of the average annual returns of the market itself during the last 50 years amounts to almost 22%.
Since we’re strong believers in (at least) weak market efficiency, we cannot accept the possibility of timing the market: there’s just no way to know whether today is a good day to invest for the next 10 years or not. The timing of the lucky investor in our scenario made all the difference.
Although this is not a very comforting conclusion, it is yet another proof of the riskiness of the stock market, despite Glassman’s claim to the contrary.
Sergey Zaks is Principal, Zaks Investment Advisory Service, LLC.
