Long-term investing doesn't work!

Don't Invest Like Jon Stewart's Mom
By Tim Hanson
March 13, 2009 Comments (15)

Hey, that was a lot of awkward fun, wasn't it?For those of you who missed The Daily Show with Jon Stewart last night, you'll have to turn to one of a million or so links on the Internet to see the rousing conclusion to "Basic Cable Personality Clash Skirmish '09," a.k.a. the weeklong feud between TheStreet.com's (Nasdaq: TSCM) Jim Cramer and Comedy Central's Jon Stewart. For those who would rather waste that 22 minutes of their life on Minesweeper or NCAA basketball, here's what we learned.
1) Yes, Jim Cramer is a manic clown.2) Jim Cramer's nephew writes the Mad Money show while wearing his pajamas.3) CNBC is not good at hard-hitting reporting.4) Jon Stewart's pretty peeved about all this and ready to drop a few f-bombs to let folks know it.5) Long-term investing doesn't work.
Wait, what?As a practitioner of long-term investing here at The Motley Fool, I was pretty shocked by this revelation. But there it was as the interview was wrapping up. Let's go to the transcript:
Jon Stewart: My mother is 75. And she bought into the idea that long-term investing is the way to go. And guess what?
Jim Cramer: It didn't work.
[Jon Stewart assents with some Arthur Fonzarelli-type hand motion and concurrent clicking noise.]
We'll assume that was an assent Now, I'm not going to pull a Rick Santelli and call Jon Stewart or his mother a loser because that would bring down the wrath of The Daily Show and Dora the Explorer (who my nephews envy, and if they saw her swearing at me in Spanish it would absolutely kill them) upon me. But even if Jon Stewart's mom -- like all of us long-term investors -- has lost a great deal of money over the past 16 or so months, that's not evidence that long-term investing doesn't work.
In fact, long-term investing is the only way to protect yourself from the manipulations, machinations, and generally idiocy that drive stock price movements on a day-to-day basis. And if Jon Stewart's mom truly is/was a long-term investor, then she should have come through this current calamity relatively ok provided she has been a long-term investor for the long-term and had been sticking to a disciplined multi-decade asset-allocation game plan. That means keeping a mix of stocks and bonds, and within that stock allocation having a mix of asset classes. It doesn't mean simply loading up on General Motors (NYSE: GM), Eastman Kodak (NYSE: EK), and Bear Stearns because Jim Cramer told you "Bear Stearns is fine!" -- and only those three stocks -- and throwing up your hands because it doesn't work.

Here's why
Let's assume Jon Stewart's mom started investing 30 years ago, in 1979, at age 45. Let's further the following simple allocation strategy:
She invested simply in the Vanguard 500 Index (Nasdaq: VFINX), a low-cost market-tracker that holds giants today such as ExxonMobil (NYSE: XOM), General Electric (NYSE: GE), and Wal-Mart (NYSE: WMT).
At age 55, she realized that she was nearing retirement and should be increasing her allocation to principal-protecting bonds, using the rule of thumb that her bond allocation should be equal to her age.
Finally, let's assume that she invested the same amount of money, be it $1, $100, $1,000, or $10,000, at the beginning of each and every year.
Where would she be today following a greater than 50% collapse in the stock market?
I realize that's a lot of assumptions
Now, portfolio simulations like this are tricky to pull off and don't account for all the details -- such as, in this example, frictional costs or dividend yields which I'm assuming canceled out -- but they are illuminating. And according to my conservative math, for every $1 that Jon Stewart's mom put in over the trailing 30-year period, she would have $1.63 today. So, if all told, she had deposited $500,000 over the years (in annual $16,667 increments), she would have $815,000 today.

Now, let's be honest, that's not great.
It's not 10% or 20% annual returns, it's not turning thousands into millions, and it's not an enormous stock market success story. But it is certainly enough to live on and evidence of how long-term investing -- provided it's practiced with discipline and an eye toward asset allocation -- can protect your wealth and give you the opportunity to make money.
Because let's be honest, though the stock market is down today, it will rebound. Commerce around the world is too strong for it to be otherwise. And the worst thing Jon Stewart's mom could do today is -- at her son's behest -- give up faith in long-term investing as the market stands at a 10-year bottom.

In sum
Numbers, jokes, and snarky comments aside, what I'm saying is this: Rather than be angry, let's recognize that the stock market, like most human endeavors, is flawed. There will be disasters and blow-ups from time to time, just as there will be bubbles. Let's use this as an opportunity to educate more Americans about how to take control of their finances and ignore the market's manic day-to-day movements.The solution is not to scare Americans into thinking the stock market is some Ponzi scheme controlled by immoral cretins that can never work for them. See, over time, those cretins are found out. And over time, everyone can make money in the stock market and enjoy a more secure retirement by having a long-term investing timeline and sticking to a disciplined asset allocation plan. That means not abandoning bonds when stocks are outperforming and not abandoning stocks when bonds are outperforming.


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