Many of you think of yourselves as long-term investors. I doubt, though, that many of you really are – and nor should you be.
The idea that long-term investing in equities is a good idea rests on the belief that over the long term luck will even out so that we will eventually get something close to the average equity premium over cash and bonds. This is why long-term investors are advised to hold bigger equity positions.
But it’s not as simple as this. Imagine 1,000 men go to the casino one night. Across all of them luck should even out: some will lose, but some will win so that taken together the 1,000 men will get something like the casino’s average net payout. However, what is true of 1,000 men in one night isn’t true of one man over 1,000 nights. If he loses everything on the first night, he’s got nothing left with which to win if his luck turns. Of course, it’s unlikely that an equity investor will be wiped out so much in the short run. But a 50 per cent loss followed by a 50 per cent gain still leaves you well down. And many investors have in the past been downhearted by losses and so pulled out of the market before it recovers.