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Markets are constantly in a state of uncertainty and flux and money is make by discounting the obvious and betting on the unexpected. - George Soros

You bet on stocks. You diversified. You lost a bundle. Should you get out? Experts disagree

Nov.09, 2008 in Market Outlook

Businessweek
Investing October 30, 2008
So Much for Buy-and-Hold Advice
By Peter Coy

They were reassured that stocks have the best long-run returns, so they plowed their savings into the market–only to watch in dismay as government bonds outperformed stocks over an entire decade. Moreover, investors were lectured again and again on the wisdom of diversifying their portfolios internationally. So they did. But foreign markets have done even worse than their U.S. counterparts lately. The most exasperating example is Japan, whose key stock market index is now back to where it was in 1981.

What many investors have failed to realize is that “the long run” can sometimes be very, very long. So says London Business School economist Elroy Dimson, co-author with his LBS colleagues Paul Marsh and Mike Staunton of the 2002 book Triumph of the Optimists, which challenged work by University of Pennsylvania Wharton School professor Jeremy Siegel, author of Stocks for the Long Run. The climb back into the black after a fall can take even longer outside the U.S., says Dimson. In Italy, he says, stocks failed to keep up with inflation over a 73-year period through 1978.

Dimson is far from the only expert betting that the U.S. market may need a lengthy recovery period. And, of course, stocks may not have hit bottom. Rajnish Mehra, a finance professor at the University of California at Santa Barbara, says that according to his calculations, stocks in the U.S. would have to drop a lot more to get as cheap–in terms of the ratio of total equity (including private equity) to gross domestic product–as they were in the dark days of the 1970s. That ratio peaked at 1.8 around 2000. It recently dropped to 0.8, but that’s still twice the 0.4 equity-to-GDP ratio of the mid-1970s, says Mehra.

As for foreign equity markets, the worst-case scenario is that some might simply go away. In the 20th century, thriving stock markets in Russia and China were closed down by communist takeovers. Granted, those are extreme examples. But even in the absence of such a doomsday scenario, international diversification doesn’t always lower the volatility of returns–because in major crises, stocks fall in every market.

…

Will stocks pay off in the long run? Statistics show they have in the past. But it all depends on how long you’re willing to wait. Investors probably shouldn’t think too hard about what British economist John Maynard Keynes once said: In the long run, we’re all dead.

Full article:
http://www.businessweek.com/print/magazine/content/08_45/b4107064257340.htm

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