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Chapter 14. In the Long Term … Myths about Markets

Chapter 14. In the Long Term … Myths about Markets

If You Wait Long Enough…

Sarah was a patient woman. She believed that good things came to those who waited long enough, and she was therefore not upset when she opened up the statements from her broker and discovered that she had lost 20% over the previous year on her pension fund investments. “It is only a paper loss,” she told herself, “and stocks always come back in the long term.” In fact, she had read somewhere that stocks had never done worse than bonds over any ten-year period in history and that stocks tended to bounce back after bad years. Since she had thirty years left to retirement, she did not worry about her losses.

Sarah's faith in the long term was shaken when she talked to her good friend Kazumi Kawamoto. Kazumi had grown up in Japan and had been saving for retirement in the Japanese stock market. She had accumulated a substantial amount in her portfolio by 1989 and was looking forward to early retirement a decade later. Unfortunately, the market plummeted in the 1990s and her portfolio declined in value by 75% over the next 15 years. Comforted at every stage by brokers who told her that stocks always won in the long term, Kazumi was now confronted with the reality that she would never make her money back and that early retirement was not an option. Realizing that stocks can lose even in the very long term, Sarah moved some of her retirement money into bonds.

Moral: Stocks don't always win in the long term.


The chapters so far have looked at sales pitches that revolve around picking the best stocks in the market, but the most powerful investment myths in investing are about the overall stock market. In this chapter, you will consider a few of these myths and the damage that believing in them can do to investors. The first and most deadly myth is that stocks always beat bonds in the long term. Following this line of reasoning, stocks become riskless to investors with long time horizons. The second myth is that market timing beats stock picking when it comes to stock returns. Buying into this belief, investors spend far more time than they should thinking about which way the market is going to move and too little picking the right stocks for their portfolios. The third myth is that market timing is easy to do and that lots of investors are successful market timers.


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