Stocks and the myth of the "long term investment"

Newsweek's Alan Sloan suggests that those of us who came of economic age during the long bull market of 1982-2000 may need to revise our historical perspective and our expectations for the market.

What we need is to remember that what we learn in our financially formative years can be wrong. Many people who came of financial age during the Great Depression—during which the Dow fell 90 percent from its 1929 peak—learned not to invest in stocks because they were too risky. As a result, they missed outstanding returns as the market boomed. Similarly, people who came of financial age during the 1982-2000 bull market may think that making 20 percent a year is the natural order of things. That's what stocks averaged during that glorious period, including 1995 to 1999, the first time the S&P had returned more than 20 percent for five years in a row. Anyone waiting for those days to return is going to be disappointed unless the laws of financial gravity are repealed.

"People felt safe about the world and safe about the market," says University of California finance professor Terrance Odean, an economic-behavior specialist. The bursting of the market bubble in 2000 and the 9/11 attacks the following year signaled the end of the no-apparent-risk era, says Odean, the author (with Simon Gervais of Duke) of a 2001 academic paper called "Learning to Be Overconfident." But despite these object lessons, Odean says, many investors still don't get it. "They give themselves too much credit when things go well," he says, "and blame external forces when things go badly."

Of course, this mildly bearish market isn't the Great Depression. It's more like the 1964-1982 market, when the Dow was essentially flat for a generation. But the fact that the SP is below where it was five years ago means that if you'd been counting on the market's generating its historical returns, you're so far behind that you'll probably never catch up [emphasis added].

Sloan doesn't mention private accounts -- or Bush's favorite: "the magic of compound interest" -- but a long term bear market is something that those who want to dismantle Social Security don't want you to think about.