How safe are stocks?

zenbuddhist

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3594660
A bootstrap simulation analysis implies substantial uncertainty about long-horizon stock market outcomes, and we estimate a 12% chance that a diversified investor with a 30-year investment horizon will lose relative to inflation. The results contradict the conventional advice that stocks are safe investments over long holding periods.

Thoughts?

sevenhills

So an 88% chance of gains above inflation?

kinger101

They are not results.  They are outputs from a simulation.

Thrugelmir

zenbuddhist said:

 The results contradict the conventional advice that stocks are safe investments over long holding periods.

Equity investments are not safe investments. They are highly volatile. Carrying the risk of a permanent loss of capital. 

JohnWinder

Thanks for the link.

I don't understand the methods, so what to think? I suppose one can comment on the conclusions even if the methods were poor and the conclusions invalid, but it becomes just the same old discussion.

Do their results of 'cumulative returns' mean dividends reinvested, or is it just asset price change?

But the conventional wisdom about long term safety is already well qualified by those pointing out that while the volatility of a long term stocks holding should fall if you measure it with standard deviation which drops as the sample size increases, the potential paper losses after 30 years of investing are much greater than the paper losses after 5 years because £1M falling 40% hurts a lot more than £80k falling 40%.

It would be nice to believe there are recognisable patterns, or some meaningful distribution which characterises stock returns for over a century which allows predictions; or is that not bootstrapping?

Nonetheless, if the conclusions were a good guide to the future would it change an already sensible approach to investing which may or may not serve one well?

HappyHarry

zenbuddhist said:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3594660
A bootstrap simulation analysis implies substantial uncertainty about long-horizon stock market outcomes, and we estimate a 12% chance that a diversified investor with a 30-year investment horizon will lose relative to inflation. The results contradict the conventional advice that stocks are safe investments over long holding periods.

Thoughts?

This report is looking at long term returns in USD, and concludes that US investors investing long term solely in American stocks have lower risk (1.2% chance of loss) than those investing in a broad selection of overseas markets. 

However, it does not dwell on the fact that USD has been a very strong currency over the past 150 years, as America has moved from a developing nation to a developed nation. This means that from an American's viewpoint, overseas markets have performed less well, but this is largely due to the rise in the strength of the USD compared to overseas currencies.

Should the US economy growth not exceed other global economies growth by the same rate over the next 150 years, then we could expect the future results to be somewhat different.

This report does not imply that a global investor in the UK would suffer a 12% chance of making a long term loss.