Decision Quality Blog

One of the bedrock truths of investing is that we should “take the long view”. I suppose that means many things, not the least of which might be . . .

• Don’t try to time the markets
• Don’t panic when things turn ugly
• Buy and hold
• Wait long enough and “the markets” and particularly the stock market will be good to you

All good advice, particularly if you’re an endowment fund that pays no taxes, has huge amounts of capital, and is built with “perpetuity” as a guiding principle. But what about you and me? As Peter Bernstein points out in a piece in the New York Times . . .

In the long run, we often hear, everything turns out well, so just hang in there. In the long run, the bumps will even out; main trends are identifiable; main trends dominate.

Yet, what use are these notes of hope when so many of us are struggling to survive in the short run? As John Maynard Keynes put it way back in 1923: “In the long run we are all dead. Economists set themselves too easy, too useless a task if, in tempestuous seasons, they can only tell us that when the storm is long past the ocean is flat again.”

Keynes touched on a profound truth that will always dilute easy reassurances about the long run. Since the beginning of time, human beings have had to make decisions whose outcomes are clouded by uncertainty. We never know what the future holds. It’s just that simple.

The problem with the long view forward begins with the long view backwards. Blur your vision and look back at the history of the US Stock market, and it looks pretty darned appealing. Lost in that blurred view are significant deviations from the mean. Look at global markets and you see even more. Meaning? If you don’t need your money, no worries. If you do, and you need it when the market is on the wrong side of the mean, and you’re not going to be happy.

Making matters worse, a significant piece of those historic returns has been fueled by handsome dividend rates. Don’t look now, but those days are largely gone, making the historic 7% total return even harder to come by without taking a whole lot of risk.

I’m no financial planner, but looking at this purely as a matter of good decision making, a couple of thoughts come to mind . . .

You should look at scenarios that consider both lower overall returns and you needing to sell assets during a declining market. Given the depressing regularity with which the big boys of global finance regularly crater the markets (every five years or so), that scenario seems more, not less likely.

There is a lot of friction in the financial system. Housing is one example. The relatively simple idea of taking out a loan to buy a house masks the fact that there are a host of seen and unseen players with their hands in your pocket from the time you sign the offer to the time you sell the house and retire the mortgage. They’re all getting paid. They all cost you money.

The same is true of nearly any other type of financial product you buy. Fees, like taxes, tend to eviscerate your total returns. It’s these kind of costs and drags that many people fail to consider when making a decision.

Tags: LongRun, Historic Returns, Stock Market, Financial Planning, Mortgages, Investments, Decision Making, Decision Quality