Thoughts from the Frontline

The Sweet Buy and Buy

By John Mauldin

September 20, 2002

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This week we are going to depart from the usual format of surveying the economic landscape for investment insights, and ask ourselves:

"What type of returns should you expect from the stock market for the next 5, 10, or 20 years?"

Over the long-term the Ibbotson study, used by stock market cheerleaders everywhere, says we should expect to make real returns of 6-7%. This statistic is used by brokers and fund managers who urge investors to buy and hold. Maybe more to the sales point, it is used by them to urge investors to buy some more stocks or mutual fund shares today and hold them as well. If you just keep buying, the study says you will get your reward, by and by.

This is the sweet buy and buy sales pitch. The Ibbotson study (and numerous similar studies) is one of the most misused pieces of market propaganda ever. If I thought for one minute you really could get 7% compound annualized returns over the next 20 years by simply buying and holding, I would agree that it would be a smart thing to do.

Today, with the help of a different and remarkable…

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