We are living in a time of extreme uncertainty and the anxiety that comes along with it. Against the backdrop of war, humanitarian crisis, and economic hardship, it's natural to wonder what effect these world events will have on our long-term investment performance.
While these challenges certainly warrant our attention and deep concern, they don't have to be a reason to panic about markets when you're focused on long-term investing.
Imagine it's 25 years ago, 1997:
- J.K. Rowling just published the first Harry Potter book.
- General Motors is releasing the EV1, an electric car with a range of 60 miles.
- The internet is in its infancy, Y2K looms, and everyone is worried about the Russian financial crisis.
A stranger offers to tell you what's going to happen over the course of the next 25 years. Here's the big question: Would you invest in the stock market knowing the following events were going to happen? And could you stay invested?
- Asian contagion
- Russian default
- Tech collapse
- Stocks' "lost decade"
- Great Recession
- Global pandemic
- Second Russian default
With everything I just mentioned, what would you have done? Gotten into the market? Gotten out? Increased your equity holdings? Decreased them?
Well, let's look at what happened.
- Single stocks have a wide range of returns. Only about a fifth of stocks survive and outperform the market over 20-year periods.
- They delist at a high rate, even those that have been around for a long time and have outperformed the market for 20 years.
- The chance of any single stock outperforming the market in the future is not meaningfully different when conditioning on its past performance.
Many investors end up holding large concentrated positions in single stocks, whether as the result of employee compensation or a handsomely rewarded stock selection. Familiarity with these stocks or a successful track record while holding them may discourage investors from diversifying. Unfortunately, this can lead to one of the most well-known cautionary tales in finances: tragic declines in wealth from losses in single securities. Data on the behavior of individual stocks suggests it's hardly rare for firms to underperform - or even go under, regardless of past performance.
A Study of US-Domiciled Mutual Fund Performance and Exchange-Traded Fund Performance
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