Stocks, Bonds or Cash ... Where to Put Our Long Term Savings ... 'The Great Winfield Explains Kids Markets'

The stock market has had a tough month and year thus far. The story over the past several years and decades, however, is a completely different one.

Over time investing our long term savings in stocks beats investing in anything else by a large margin.

So why don't more people, and especially young people, take into proper consideration the certainty of short term stock market volatility and frequent stock price declines compared to the almost certain long term benefits of stock market investing and share price increases for satisfying their long term financial needs?

Is it due to a lack of knowledge? And if it is, then please consider the following helpful information and market history in Bull market in stocks will resume when we're older and wiser:

                

"This bull market’s long-term health desperately depends on investors first becoming older and wiser about what’s realistic.

Unfortunately, we’re not there yet, despite the stock market’s recent turmoil. It’s a particularly bad long-term omen that there have been so many cries of anguish over the recent report that Treasury bills have beaten both stocks and bonds so far this year.

This isn’t to deny that it’s been a long time since this was the case — more than 20 years, in fact. But the last two-plus decades are the exception rather than the historical rule. Over the past two centuries . . . T-bills have outperformed both stocks and government bonds in an average of more than one of every five calendar years.

Bull markets’ long-term health is dependent on investors knowing this historical fact and appreciating what it teaches us about risk. One way of viewing bear markets’ function is to educate successive younger generations to this risk and to re-educate older generations who have forgotten it.

It is interesting to note in this regard that the 2008-2009 bear market only partially succeeded in educating people. That’s because bonds soared during that equity debacle, seducing investors into the false sense of security that they will be OK as long as they diversify their portfolio between stocks and bonds.

As you can see from the chart above, this assumption is not infrequently wrong.

But won’t stocks and bond investors come out ahead of Treasury bills if they hold on long enough?

Yes, provided the future is like the past and — an even bigger if — you hold on the for the very long term. Even when we expand our focus to 10-year holding periods, as you can see from the chart, T-bills still have beaten both equities and fixed income more than one of every 10 times. . . .

One of the more hilarious descriptions of the role historical memory plays in the market cycle appears in the investment classic “The Money Game,” pseudonymously written by Adam Smith. He described how the market oscillates between two different sentiment environments depending on whether historical memory helps or gets in the way.

On the one hand, he wrote, there are so-called “kids markets” in which those making the most money are too young to remember the last bear market. At the other extreme are periods when it’s crucial to remember that the markets can go down just as easily as go up.

Smith described a friend of his called The Great Winfield who was exploiting a kids’ market by only hiring investment managers who were not yet 30 years of age: “The strength of my kids is that they are too young to remember anything bad, and they are making so much money that they feel invincible. Now, you know, and I know, that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes [the rest of] us” who are old enough to remember.

The market’s recent weakness and extraordinary volatility has been particularly hard on the current generation of “kids,” who are quickly becoming older and wiser. It is perhaps little solace to them today, but they are setting up the preconditions of the bull market’s next long-term move."

Summing Up

Individual savers should focus on their long term financial needs and the propensity of the stock market to rise when considering how to invest those savings for the long haul.

And over time stock returns beat other investment alternatives by a huge margin.

Although nobody knows with certainty what's going to happen to market prices today, next month, next year, or even the next decade, we all know how old we are.

We should save and invest based largely on the calendar.

For short term needs, keep some cash. For the long haul, invest in blue chip dividend paying stocks.

That's my take.

Thanks. Bob.