The 2000–2010 decade helped many equity investors better understand what the word “risk” truly means. For an entire decade US equities had no real return. Making matters worse, it was not a steady ride down. There were plenty of opportunities to capitulate at market lows.
It is common practice to assume that stocks will inevitably be the best asset class for the long run and because I am a young investor many would advise me to hold strictly equities. Even if stocks for the long run turns out to be true, it is still entirely dependent upon how you define the long run. Personally, a decade is a long time for me. I am not the kind of investor who can tolerate no real return for an entire decade. Nor, do I care to see my portfolio get whipped around by the emotional asset markets. Any strategy that exposes me to large losses over a prolonged period is unacceptable.
From my perspective, the stocks for the long run hypothesis has already been disproved even when we expand our time horizon. Our last century has been kind to the US stock market but that doesn't mean that risk diminishes with time. If you are not convinced, just ask any Japanese equity investor how time has treated their portfolio.
Here, we see the Japanese Nikkei 225 index:
Perhaps their “long run” has yet to come? Should we just ignore Japan? Is it an outlier with no relevance?
All of these findings left me unsatisfied with the prospect of simply buying and holding equities for the long run. Stocks play a valuable role in a diversified portfolio, but I could not ignore the risks.