Applicable 50 years ago, 20 years ago, and today.
Q: You always say to invest for the long-term. What do you mean by long-term investing?
A: A lot of people think long-term investing is three weeks from next Wednesday, but when I talk about long-term investing I mean 5, 10, 20 years. During that length of time the market can experience ups and downs due to what I call “background noise.” Events occur – hurricanes, wars, political instability, currency and bank crises – that make investors nervous and cause market volatility. It does get nasty at times, but it shouldn’t cloud investors’ judgments about thinking long-term. The key organ here is your stomach. Everyone has the brainpower, but not everyone has the stomach for it.
Q: You have said volatile markets underscore the need for diversification. Has anything changed that would alter your position on diversification?
A: Diversification has and always will be a critical component to investing wisely. Here’s an example: Of the 21 years in which stocks have had negative returns, medium-term government bonds had positive returns in 19 of them. I’m certainly not saying that bonds perform better than stocks, because we know over the long-term it’s not the case. But it makes a pretty good argument for diversifying into a wide range of equities, bonds and other asset classes. And don’t get caught in the trap of false diversification within equities. A lot of people bought a number of technology funds and technology stocks but that constituted their entire equity holdings. When the Nasdaq declined, all those equity holdings went down together.
Q: Any parting thoughts for investors?
A: A couple of things. First, if you’re going to need money within 12 months to pay for a wedding or put a down payment on a house, the stock market is not the place to be. You can flip a coin over where the market is headed over the next year. I have no idea whether the next 1,000 points for the Dow or Nasdaq will be in positive or negative territory. But if you’re in the market for the long haul – 5, 10, or 20 years – then time is on your side and you should stick to your long-term investment plan. I would argue that the stock market will be higher in five years from today. That’s been the long-term trend. The bottom line is to have a responsible plan for your investments and the will to stick to it.