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Long Term Investors Can Lose

Posted By Barry Ritholtz On May 8, 2005 @ 7:19 am In Investing,Markets | Comments Disabled

 We last looked at what Charlie Minter and Marty Weiner had to say in Risk is on the Rise [1].   

Long Term Investors Can Lose
In the late 1990s we pointed out that
investors were actually running great risks in buying stocks at excessive
valuations near the end of secular bull markets.

Although valuations are somewhat lower than the ridiculous
heights reached in early 2000, the cyclical bull market since October 2002 has
once again put the market in a position where the risks of losing money — or at
least not making any — are once again very high.

The kernel of truth in the long-run thesis is that U.S. stocks
really have returned about 10% a year on average over the very long term. There
are two factors, however, that proponents often overlook when promoting this

First, of the 10% overall return, about 4% has historically
been accounted for by dividends, leaving about 6% attributable to the gain in
the stock index alone. Since we know that the current dividend yield is only
about 1.8%, the historic 10% return is not applicable to the current

Second, and more importantly, there have been many long periods
where the market not only did not return 10%, but actually declined.

Furthermore, since 1903 there have been 26 different years
where at some point that year the Dow was lower than at another point 15 or more
years before.

This comprises a full 25% of the total number of years within
that span. It is therefore extremely misleading to conclude that investors can
enter the market at any point in time and be reasonably assured of a 10%

– Charlie Minter and Marty Weiner
Comstock Partners
24 S. Main Street
Yardley, Pa. 19067
(Tel) (215) 493 7076




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[1] Risk is on the Rise: http://bigpicture.typepad.com/comments/2005/03/risk_is_on_the_.html

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