Chapter 8What Do Economists Say about Buy-Hold?
Suppose I asked you to predict the weather tomorrow. Then I asked you to forecast the weather a year from now. Which prediction is more likely to be wrong (i.e., the riskier prediction)? The stock market is just the same: The longer the time horizon, the more chance you take that something in the future will come along and blow a big hole in your investments.
In 2012, Lubos Pastor of the University of Chicago Booth School of Business and Robert Stambaugh of the Wharton School at the University of Pennsylvania won the first Whitebox prize—awarded to outstanding financial research—for their paper on the volatility of stocks. After studying over 200 years of stock-market data, the professors found the longer an investor holds on to stocks, the more that volatility (and risk) increases. Over one year, stocks showed 17 percent annual volatility; over 30 years, 21 percent; and over 50 years, 23 percent. In an interview with Cheryl Casone of Fox Business News, Lubos said, “Investors looking into the future don't only buy the historical estimates, but also buy the uncertainty associated with those estimates, and the uncertainty compounds with time.”
Pastor also noted the good fortune we boomers had during our prime investing years, saying, “The average historical return in the 20th century includes good luck, and it's not clear we'll have the same productivity growth in the future.”
Wharton professor Jeremy Siegel also considered long-term ...
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