Re: Investing (long term returns)

From: Rob Sweeney (
Date: Wed Jun 07 2000 - 23:11:57 MDT

* altamira <> [000608 00:26]:
> In the chart you link to, the bonds are long term and were subject to more
> years of inflation than deflation during the years covered. This would not
> be the case with the strategy I suggested of buying only short term bonds.
> I agree that T-bills are not a good investment for the long term.

Agreed that a short-maturity strategy mitigates much of the interest rate
risk while usually providing a better overall yield than just holding cash,
however equity investments _over time_ have always outperformed this. I
read a reference today while tracking that other chart down that showed that
there has been no 25 year period in which you would not have done better
invested in the stock market than in cash or bonds.. it was on the Motley
Fool site but I'm not at that machine now so I don't have the URL.

> As the standard deviations for the 3 asset classes indicate, stock returns
> are far more volatile than returns on bonds. If you take a smaller
> assortment of stocks, which is what most people end up with, the volatility
> will be even greater. Most people, if they purchase stocks for their own
> portfolios, can't afford to diversify widely, and mutual fund managers don't
> seem to have all that good of a track record.

This may have been somewhat true in the past but is no longer so, as
mutual funds are widely available and easy to purchase. As plenty of, say,
Vanguard literature would say, a market index fund, such as their S&P 500
trust, by _definition_ (because it's a market index fund..) will have as good
a track record as the market proxy itself (less the minimal administrative
costs associated with running the portfolio).

> Some volatility wouldn't hurt
> if you were prepared to hang on for the long term, it's true. And a person
> could transfer their money out of stocks and into bonds at retirement age
> when they want to withdraw money periodically. But what if a person reached
> retirement age just as the market went into a slump of several years'
> duration? Also, some of the volatility which appears negligible on a chart
> translates into rather severe losses for the individual investor.

Agreed that with a limited portfolio and/or a short term time horizon,
an investor is wide open to all sorts of volatility, in either direction,
and that the stock market isn't an appropriate place for funds which you
will _need_ in the shorter term. (_that's_ where short term bonds shine).
As you approach, say, retirement, or any other point where you're going
to need the money, it's prudent to trim down risk - though many advisors
recommend that even retirees stay mostly invested in the stock market -
i.e. if you plan to retire at the historical 65 and you plan to live to,
oh, well into your 90s (900s? let's be extropian?), that's a long time
for any volatility to shake itself out. With mutual funds no one need be
open to the risk (or, as always, the reward..) of individual stocks.. but
as you point out, many fund managers don't have great records - when
compared to the benchmarks they follow. Hence indexing.

There are shelves full of books and web sites on basic investment strategy
which go into this in excruciating detail.. the Motley Fool (
is among the best IMO.. (and I don't consider myself a great investor
by any means.. way way too risk averse for my own good, but I'm getting
better :-)). There's nothing wrong with any investment strategy, provided
it matches your own goals, personal preferences, and comfort levels - a
strategy is still somewhat successful IMO if you lose money over time,
but you can sleep at night and you value that. But the way I see it,
returns of investments (over time intervals that are appropriate for the
investment!) are measured quantities; it's a matter of math, and if you're
looking for returns over the long run, historically, the results say you
need to be in the stock market.

(standard industry disclaimer: "Past performance is no guarantee of
future results" :-) )

/rs Rob Sweeney
Time is a warning.

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