The Fallacy of Long Run

As an investor, should you think long run? Absolutely. Many of us save towards a house, children’s education and retirement, which require long-term planning.

But does it make sense to make your investment decisions based on 30-year averages for risk and return? If I tell you that the average temperature in Boston is 51.4F over the last thirty years, would you use that to decide what to wear today?

Yet the investment professionals are doing exactly that, making decisions based on 30-year averages, and tell us to stay put through the ups and down. In a way, it makes sense since nobody can really time the market, but you don’t have to go to the other extreme not considering the market conditions we are living through now.

As John Maynard Keynes famously said, “But this long run is a misleading guide to current affairs. In the long run we are all dead.” Dr. Andrew Lo echoes this sentiment, “In the long run, we may be all be dead, as Keynes suggested, but we need to make sure that the short run doesn’t kill us first.

By J. Helen Yang, CFA

The Fallacy of Long Run

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