Q: My wife and I, both 80, are comfortably retired with no debts. We do everything we aspire to including generous giving, volunteering and a lot of travel. Contrary to the usual advice, we are invested for long-term growth with the goal of bequeaths to our descendants and charities. Although our country’s economic health over the next 10 to 20 years seems uncertain, we have been unwilling to give up on potential growth of the kind we enjoyed over the past 50 years. Are we on the wrong track?
A: The essence of investing is uncertainty. History is a story full of unexpected shocks and surprises. I’ve always liked this example to highlight the uncertainty. Put yourself in the shoes of a European investor in 1900. The emerging equity markets of the U.S. and Argentina looked extremely attractive, with a slight edge to Argentina.
Yet the buy-and-hold investor would have pocketed a small fortune in U.S. equities and would have been essentially wiped out in Argentina over the course of the century.
U.S. stock markets survived two world wars, a great depression, severe inflation, and political unrest, notes economic historian William Goetzmann.
There’s no guarantee that the story of America’s sturdy economy will continue over the next century. Pessimists believe the U.S. is a declining empire, much like Spain and Britain in earlier eras. That said, I count myself among the skeptics when it comes to the long-term decline narrative.
U.S. business has done well over time, with the Dow Jones Industrial index at 68.13 on Jan. 2, 1900, and above 16,000 currently. American companies are among the most dynamic in the world, and corporate profits are flush. The pessimistic case would carry greater sway with me if the pace of technological innovation was slow, but it seems to me that information technologies and digital advances are poised to transform the way we work and live. My own guess is that we “ain’t seen nothin’ yet.”
So, what are the implications of these observations for you? First, diversification pays. Spreading your savings among the major asset categories will smooth out the portfolio performance, allowing some assets to zig while others zag. Investing with a “margin of safety” is the bedrock idea of personal finance. Second, the advantage of your long time horizon is that your beneficiaries will have the flexibility to ride out the inevitable bear markets and long period’s poor asset returns unlike, say, an aging boomer nearing retirement.
Last, I would heed the advice of Warren Buffett, the investing sage of Omaha. He recommends that the nonprofessional investor “own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal,” he writes in his annual letter to Berkshire Hathaway shareholders. Buffett cautions against getting caught up in the mood of the moment, whether exuberant or downbeat.
“The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs. Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results,” Buffett adds.
My bottom line: I don’t think you’re on the wrong track.
Chris Farrell is economics editor for “Marketplace Money.” His e-mail is email@example.com.