Long-term investing keeps its old-fashioned shine

Long-term investing keeps its old-fashioned shine
Five-year stock funds have yielded far better returns than long-short funds


By CHET CURRIER

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WATCHING the daily driftings of the stock market nowadays, one can get the mistaken impression that these must be unrewarding times for long-term investors.


Not so, not so - and the error is easily disproved. Let's tear ourselves away from the current market charts, and look instead at a five-year mutual fund table.

The more than 4,600 US-based stock funds tracked by Bloomberg averaged a 10.7 per cent a year return over the past five years through the week ending April 6. As a point of reference, in roughly the same period consumer price inflation has run at a 2.7 per cent annual pace.

Funds that invest outside the US have done even better. Diversified emerging markets funds, in particular, have climbed 24 per cent a year since early April 2002, according to the research firm Morningstar Inc in Chicago. Domestically, real estate and natural resources funds have each advanced more than 20 per cent per annum.

The going has been tougher in the categories of funds that fell the hardest in the early 2000s bear market - large growth funds, which have recovered at just a 4.6 per cent-a-year clip since early 2002, and technology funds, which have risen 4.5 per cent annually.





Even those stragglers have beaten Morningstar's long-short funds, which returned 4.4 per cent applying a hedge-fund-like style of playing the market from both sides. The big losers have been bear market funds, down 9.5 per cent a year in their quest to profit from market declines.

Five years is a traditional line of demarcation that defines true long-term investing. Looking back five years from today serves nicely to remind us of how difficult it can be to make, and stick with, that kind of long-term commitment.

In the early months of 2002, stocks had been falling for two years, and the worst six months of the bear market still lay ahead. The shock of the terrorist attacks of Sept 11, 2001, still was fresh in every mind, and the daily business headlines brimmed with such scandals as the collapse of Enron Corp. The US economy had just limped through its weakest year in a decade, recording year-over-year growth in real gross domestic product for 2001 of just 0.8 per cent. A not-much-better increase of 1.6 per cent was in store in 2002.

The Federal Reserve, increasingly concerned about the threat of deflation, had been cutting interest rates since the start of 2001. The Fed's target rate on overnight bank loans stood at 1.75 per cent on its way to one per cent by mid-2003.

To discourage anyone from shopping the stock market for bargains, the price-earnings ratio of the Standard & Poor's 500 Index stood at a lofty 45-to-1. That lent plenty of credence to the bears' argument that stocks still had a long way to fall after the collapse of the 1990s bull market.

Anyone in possession of a crystal ball could have seen more obstacles in the markets' path in 2003 - including the start of what would prove to be a long and difficult war in Iraq, and the spread of business scandals to the mutual fund business itself.

In this setting, unsurprisingly, not many people were stepping up to buy stock funds. Net cash flow into equity funds, as reported by the Investment Company Institute, had set a record of US$309 billion in 2000. It shrank to just US$32 billion in 2001, and went negative - a US$27 billion outflow - in 2002.

But a big chunk of money that was already in stock funds stayed there. Stock fund assets ended 2002 at about US$2.7 trillion, down from about US$4 trillion two years earlier. That battered but still substantial remnant became the pool of investments that was in the right place to reap the full rewards of the recovery to come.

From this statistical portrait, we can see that long-term investors possess no special knack for buying at the bottom or getting out at the top. It's a game of endurance, not quickness or agility. All of this testifies that, as much as ever, there is good money to be made in long-term investing. It just isn't easy money. - Bloomberg

Chet Currier is a Bloomberg News columnist. The opinions expressed are his own