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Lubos Pastor of the University of Chicago Booth School of Business explains why the 'buy-and-hold' strategy adopted in the 1990's doesn’t work anymo...
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Cold thank you very much while conventional wisdom says to avoid volatility -- play it safe over the long run.
Buy and hold those stocks right will not according to my next guess is as investors beware buy and hold is a solid strategy as you may think clueless pass a professor of finance.
At the University of Chicago Booth school of business joins me now professor -- wrote what is not a war -- -- paper you looked back over 206 years.
A market history what does that tell you why does that -- that this strategy that we believed to work in the ninety's doesn't work anymore.
We'll historically had worked very well.
Based on the historical estimates of volatility has been strong -- -- -- in the US stock market.
Which indicates that stocks have been less volatile over longer investment horizons.
And my -- of stand by night we calculated forward looking estimates of volatility.
Which are different from the historical -- and the forward looking ones which are relevant to an investor's suggests that stocks are indeed more volatile in the long run.
Well I mean what -- -- got to -- the -- English for everybody that the didn't read the 450 page paper try to act I couldn't do it but.
When it comes to volatility you say that basically for one year.
You account if you've equipped 17% of all toll on the market thirty years were facing what -- -- percent annual volatility.
It it's fifty years -- live 23% annual volatility why have the -- tell his side of this that you say is is the warning signal problem.
That's.
Because investors looking into the future cannot only about a historical estimates but also by the uncertainty associated with those estimates and that uncertainty.
-- compounds with time.
Think about compounding you know -- compounding and 4% don't compound it 5%.
There's not much difference -- -- -- -- -- but if we invest with thirty years there's going to be a big difference.
Well I think it's OK so long term -- let's take the standard imports for instance because many of our viewers.
Believe that you know you've always wanted to tap the money in this S&P 500 -- ago you know even if it is ten years that long to return since 2002 that's ten years.
But put 101000 dollars and -- BS PY.
4% that's 400 dollars over the last ten years are already -- costs and you're telling me that I can't even do that going forward.
Well our conclusions -- not specific that today's circumstances -- -- broad based on 200 years of data.
Some certainly not getting advice about -- not cutting down on stocks today or or.
And investing more in stocks today we're making a broader point that investing in stocks -- and holding for a long period of time -- riskier than the conventional wisdom has suggested.
But why findings different and I realize that you consulted a lot of -- -- respected.
Economists around the world for -- and that's why take years to put this together but at the same time why do you believe.
That you're you're coming up with a completely different conclusion is -- Jerry Siegel was -- -- ninety's for saying buy and hold in the ninety's that worked.
We are identifying an important influence on long horizon volatility and that's uncertainty about the historical estimates think about it this way on the one hand you -- mean reversion.
Which has made stocks less volatile to long horizon investors historically.
On the other hand you have uncertainty about the historical estimates in particular uncertainty about the equity -- -- -- about the long term trend on which stocks fluctuate and we quantify those two.
Those two influences we find that uncertainty about the equity premium prompts me an aversion in the long Iraq.
All right well professor live us past our again in a war wedding paper from UN and we shall see the play is unfortunately it'll but doesn't but it might thank.
