stockholder’s return will fall behind the return he or she would get on
Treasury bills or bank certificates. The high probability that bonds and
even bank accounts will outperform stocks in the short run is the pri-
mary reason why it is so hard for many investors to stay in stocks.^2INVESTOR RETURNS FROM MARKET PEAKS
Many investors, although convinced of the long-term superiority of eq-
uity, believe that they should not invest in stocks when stock prices ap-
pear high. But this is not true for the long-term investor. The
after-inflation total return over 10-, 20-, and 30-year holding periods
after the eight major stock market peaks of the last century is shown in
Figure 2-2.
Even from major stock market peaks, the wealth accumulated in
stocks is more than four times that in bonds and more than five times
that in Treasury bills if the holding period is 30 years. If the holding pe-
riod is 20 years, stock accumulations beat those in bonds by about two-
to-one. Even 10 years after market peaks, stocks still have an advantage
over fixed-income assets. Unless investors believe there is a high proba-
bility that they will need to liquidate their savings over the next 5 to 10
years to maintain their living standard, history has shown that there is
no compelling reason for long-term investors to abandon stocks no mat-
ter how high the market may seem.
Of course, if investors can identify peaks and troughs in the market,
they can outperform the buy-and-hold strategy that is advocated in this
book. But, needless to say, few investors can do this. And even if an in-
vestor sells stocks at the peak, this does not guarantee superior returns.
As difficult as it is to sell when stock prices are high and everyone is op-
timistic, it is more difficult to buy at market bottoms when pessimism is
widespread and few have the confidence to venture back into stocks.
A number of “market timers” have boasted that they yanked all
their money out of stocks before the 1987 stock crash or the 2000 bear
market. But in 1987 many did not get back into the market until it had al-
ready passed its previous highs. And many of the bears of the most re-
cent decline are still out of the market, despite the fact that most market
averages have hit all-time highs. In the long run, getting out of the mar-
ket at the peak does not guarantee that you will beat the buy-and-hold
investor.CHAPTER 2 Risk, Return, and Portfolio Allocation 27
(^2) Chapter 19 on behavioral economics analyzes how investors’ aversion to taking losses, no matter
how small, affects portfolio performance.