Is Long Term Investing a safer bet?

There are many different opinions on the safety of long term investing. The best answer to the question in my view is:

It’s relatively safe if you don’t buy at the end of a major boom period. Let me explain why I have this view.

If we are to speculate where the major stock markets will be in say 30 years time, we realistically only have past performance to use. Whilst history often does repeat itself in the financial markets, it is certainly not guaranteed.

A good example of history repeating itself is the 2008 financial crisis and subsequent recession. Although not identical, there was a similar financial crisis in the 1930s with a subsequent recession. The root cause of this recession/depression was people taking on too much debt. I know it may seem like I am straying off topic quite a bit here, but the reason will soon become clear.

In the early 1920s, the low was down at around 70 points, after this a major boom occured, this was often known as “the roaring 20′s”. By 1928, the boom pushed the dow upto 380 points.

You can see on the chart below what happened next.

1930s dow jones chart

In 1928 there was a major stock market crash. The dow fell from the high of 380 all the way down to just 44 points in the space of three years. This is a loss of around 89%

It was not until the mid 1950′s that those 380 levels were reached again and if we are to factor inflation into the equation, it is around 1967.

So there you have it, if you invest at the wrong time, history has shown us that even over a 30 year period, long term investing is not neccerily a safe bet.

Does timing matter with a buy and hold strategy?

Many people argue that timing is not important if you are are using a buy and hold stratetgy. Personally I beleive it is true to a degree.

I think long term investing in the stock market is about as safe as you are going to get if you apply basic common sense. If there been a huge boom for a whole decade, where the market has gained several hundred percent, then buying at the top of it could be a very bad move as demonstrated in the 1920s.

However, lets look at the oposite scenario. Using the same example, if you bought in 1932 when the price was 50 and held it to 1954 that could have earned you around 760% over the 22 years. This is an average compounded return just shy of 10% per year.

Other significant stock market crashes occured in 1987, 2002 and 2008.

So in answer to the question, yes timing can be very important. However, as it’s unrealistic to expect to get the timing perfect, as long as you don’t buy after a very long bull run, you can greatly increase your chance of success.