Indeed, they point out that in lots of markets you never know if equity returns are going to exceed bond returns.
…as Deutsche Bank’s long-term asset study (the subject of yesterday’s post) makes clear, this has not been true for all markets. Over the last 50 years, the real returns from equities have been lower than those from bonds in Germany, Japan and Italy. In the Italian case, the gap is almost three percentage points, and that is despite the recent bond sell-off (actually, as Deutsche points out, a 5-6% yield on Italian debt is quite low by historical standards.)
Why, then, is buy-and-hold taken as such an article of faith by many naive investors? The Economist makes it clear that it is simply an accident of history.
The buy and hold mantra was developed in the US where real equity returns have generally been positive over long periods. But the US was history’s winner in the 20th century; enjoying 100 years of political stability while its European rivals destroyed themselves in two world wars and Russia followed the dead end path of communism. The US equity market, in other words, displays distinct survivorship bias.
We’ve written many times about the Japanese equity experience of the last 20 years as an example that markets don’t have to go up, even over the very long run. Markets don’t guarantee you anything except a chance to compete for returns.
Most important of all, The Economist piece has a very sage piece of advice—maybe one of the most important things for an investor to keep in mind.
There is nothing so catastrophic for an asset class as the conviction that its price can only go up.
I got your buy and hold right here