What are the odds of winning with long-term investing?

Posted Mar 3rd 2009 1:00PM by Connie Madon
Filed under: Market Matters, Personal Finance

So you are in the market for the long haul. You can almost forget about it. According to Professor Elroy Dimson of the London Business School, there is only a 50% chance of ever going back up to the 2007 highs, and that would take at least nine years.

Dimson also says forget about the common belief that good times always follow bad times. Following the worst years in the market, stocks outperformed cash by 7.1% to 6.8%, a virtual dead heat.

This next one really hurts: If you believe that stocks become riskless if you hold on to them long enough, forget about it. It simply doesn't work. We've have four global bear markets since 1900 in which averages have fallen at least 40%. The risk is that by holding on, your investment may come back, but it can also wipe you out along the way.

Dimson looks back to the pessimism of the 1950s when the U.S. was engaged in the Cold War and likens the present day pessimism to that period. Even if the Dow doubles in nine years, that's only a 7.9% return per year. The one fact to keep in mind is that since 1900, stocks have averaged only 6% per year. This is generally what you can expect over the long term.

When should you buy? First you must make provisions for any disasters that might occur, such as sickness and also normal expenses such as retirement, children's education etc. Then and only then can you even think about investing. In the meantime stay liquid. If after all of this you still have money, then you can begin, but begin very slowly and don't expect to shoot the moon.

When would you buy stocks?

Tags: bear markets, BearMarkets, featured, long term investing, LongTermInvesting