You Only Live Once

credit: http://www.flickr.com/photos/49568889@N08/7684077336/sizes/m/in/photostream/

I’m a HUGE fan of Lonely Island. Came across this awesome music video titled YOU ONLY LIVE ONCE, feat Adam Levine and Kendrick Lamar (who?).

I love it because it makes fun of people who take risk a little too seriously (“Two words about furniture: KILLING MACHINES!!”).

But while we scoff at the idea that we should stop going to clubs because loud music is bad for your ears, it amazes me that so many young people adopt that very same mindset when it comes to investing.

Here’s an interesting thought: Investing in the stock market is risky in the short run, but it’s the safest investment you can have in the long run.

The stock market is risky in the short run

Let’s tackle the first half of that last para first. Check out the returns from the stock market’s five worst years, from Financial Ramblings:

  1. 1931, -52.7%
  2. 2008, -33.8%
  3. 1930, -33.8%
  4. 1937, -32.8%
  5. 1974, -27.6%

So yep, in the very short term, buying and holding stocks is risky. Based on what history tells us, you could lose as much as half of your portfolio in a single year – Investors sure as hell weren’t popping champagne in 1931.

But it kicks ass in the long run

But it’s a very different story when you’re holding stocks for long periods of time.

Jeremy Siegel (whose classes I used to crash in college to leech off his market insights – woot woot!) argued in Chapter 2 of his book Stocks for the Long Run, that with a sufficiently long holding period, stocks are actually less risky than bonds.

According to Wikipedia, “During 1802–2001, the worst 1-year returns for stocks and bonds were -38.6% and -21.9% respectively. However for a holding period of 10-years, the worst performance for stocks and bonds were -4.1% and -5.4%; and for a holding period of 20 years, stocks have always been profitable.” Bonds, however, once fell as much as -3% per year below inflation.

In short, Siegel found that if you held stocks for 17 years or more, you never lost money even in the worst case scenario. 

Okay, so critics might claim that his findings are way too optimistic, and that the stock market’s prosperity in the 20th century may not necessarily repeat itself. But what’s the alternative? Investing in scammy gold buyback schemes?

The truth is, based on any historical record so far, the safest, and best, long-term investment for most young people has clearly been a diversified portfolio of stocks. Yes, even after you account for the stock market crashes in the past couple of years.

Young Heart, Run Free

And therein lies the awesomeness of being young and sexy – as young people, we have the luxury of having enough time. Enough time for a long career of earning money ahead of us. Enough time to hold on to our stocks without worrying about their fluctuations in any given day/month/year, knowing fully well that in the long run, we’ll come out on top.

So please. Stop getting intimidated by the stories of banks failing, and quantitative easing, and Justin Bieber’s Twitter account getting hacked. These are all short run risks (especially if you’re Justin Bieber), which are irrelevant if you’re holding out for the long term.

Take a little bit of risk in the short run to enjoy some awesomeness in the long run.

You only live once.

Image credit: TheOnyxBirmingham

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Some Good Investment Research… and Terrible Advice

I didn’t want to blog about investing till much later, but the Straits Times had an interesting article yesterday titled Stocks v Property. It deals with the issue of “Where the hell should I put my money?!” when it comes to investments. Everyone talks about investments, like: “yeaaahhhh I should really save up for a house… but it’s really expensive…” or “yeaaaahhh I’ve been meaning to invest for awhile now, but I don’t think I have enough time/money/interest…whine whine whine”. But very few people actually get off their ass and actually do some real research on what they should be investing in, so they either 1) don’t invest altogether, or 2) make some stupid investment decisions.

So an article like this gets some of that research done for you, which is awesome. I loved the first part of the article, which used numbers and statistics to back a case and destroy some common assumptions that we all have. The article should’ve just stopped right there, but part 2 of it gave some absolutely terrible investment advice, and I just had to say something about it, in a minute.

Some good investment research

From the ST article: “Retail investors, especially those in Singapore, tend to think of stocks as a short- to medium-term investment. When seeking a long-term investment, most Singaporean investors think of property first. 

But a recent comparison done by the Singapore Exchange (SGX) has shown that, in fact, local stocks have outperformed private residential property over the long run. In the 10 years from 2001 to 2010, the benchmark Straits Times Index (STI) gave an annualised return on investment of 4.9 per cent. Meanwhile, if you had bought property in 2001 and sold it in 2010, you would have made an annualised return on investment of 3.9 per cent over the period.”

Sure, the study excluded returns from dividends and rents, but add those into the mix and stocks have still historically outperformed real estate over the long run. And while 10 years is hardly considered to be the “long run”, other studies have shown that stocks have outperformed real estate over longer time periods (see this New York Times article).

Some terrible investment advice (esp if you’re young):

So the Straits Times article would have been awesome if it had presented the statistics, drawn a conclusion, and stopped there. But page 2 of the article had some terrible investment advice:

Mr Vasu Menon, OCBC Bank’s head of content and research, noted that such wild swings in the stock market are even more prevalent today. As a result, he said, holding on to stocks for the long term is no longer a relevant strategy in this day and age.” (emphasis added).

“So even if stocks had outperformed property between 2001 and 2010, he said, there is no guarantee that they will do the same over the next decade. His advice: Set a target for your stock investments and have the discipline to stick to it. Say, for example, that you hope to make a 30 per cent return on a certain stock within three years. If the stock somehow reaches that 30 per cent target within six months, just sell, Mr Menon said.”

Hello?! Stocks are “no longer a relevant strategy in this day and age” just because the market has been volatile and uncertain? Mr Menon obviously needs a lesson in economic history: volatility and uncertainty are NOTHING NEW to the stock market. They’ve always been there – the Great Depression from 1929, the 1940s when stocks pretty much didn’t go anywhere, the “Black Monday” of 1987, the dot-com bubble of 2000, the collapse of Lehman in 2008…  and yet the US market has averaged a whopping 9.96% annually from 1920 to 2010. Volatility and uncertainty aren’t “unusual”, they’ve been characteristic of the stock market for the past 200 years. And anyone hoping to benefit from the long-run return of the stock market would have to learn to deal with these characteristics.

Next – Mr Menon is advocating that you cut your gains short by selling as soon as your stocks make a certain amount of profit. Sure, that might prevent your portfolio from turning into a loss, but it also prevents you from ever getting rich if the stock market does take off, leaving you sitting by the sidelines and whining like a baby. If you’re a young investor with a steady income and many years of investing ahead, then Mr Menon’s advice is absolutely terrible for you. He’s right that there is no guarantee stock prices will rise over the next decade – there are no guarantees when it comes to investments (unless you consider Ponzi schemes to be “investments”) – but over a long enough time period, there’s a pretty damn high likelihood that the stock market will come out on top.

So what the hell should you do?

Let’s be clear – your job isn’t to make sure that your portfolio makes money over the next 6 months, 1 year, or 3 years. Your job right now is to ACCUMULATE as many assets as you can. Since we know that stocks are ultimately likely to give you the best return over the long run, your job is to make sure that you have as many of those assets as possible, so that your returns will be multiplied across all those assets after a long, healthy period of investing! We’re talking 10, 20, 30 years here. Who cares if volatility wrecks havoc to your portfolio over the short run – it doesn’t make a difference because you’re not thinking of selling within the next couple of years anyway. Ignore the day-to-day fluctuations, ignore the uncertainty and fear that pervade the news, and ignore the stupid, complicated investment advice out there. Investing can be simple, straightforward, and best of all, automated (I’ll be blogging about that in time to come). Stick to your guns and accumulate as many stocks as possible, and you’ll be rewarded in the end.

To me, the answer is pretty clear: multiple studies, research and 200 years of stock market history have shown that the stock market is more likely to give you a better return over the long-term. Do I think that property is a bad investment? Of course not. The best portfolio would consist of both stocks AND real estate, among other asset classes. There’s way too much to say on this topic, so I’ll be blogging more about it as we go along. But I thought I’d start us off with a little taste of it here. 🙂