Forget the dire predictions: Get invested for the long term

Since the subprime mortgage mess hit the markets like a bombshell earlier this year, economists and analysts have been working harder than ever to forecast its future effects. Forecasting potential outcomes is big business in the financial markets, and there is no dearth of “experts” and TV talking heads telling us what lies ahead. Their record of prediction is pretty poor as evidenced by the perpetual surprises that send the market soaring, as it did after the one-half point interest rate cut by the Federal Reserve, or plunging on news equally unforeseen.

Stepping back from the market’s day-to-day action can give an investor greater perspective. A longer view illustrates two vital lessons: first, how difficult it is to predict the unpredictable, and, second, whether it is even necessary to predict, given the market’s propensity to rise over time. Rather than the three or six-month view Wall Street considers “long term,” try a 25-year look at the markets, world history, and your own life.

In 1982 Ronald Reagan was in the third year of his presidency. Did you predict then that six years later his vice president, George Bush, would become president, or, even more improbably, his son, George W. Bush—a 36-year-old Texas oilman in 1982—would also become president? Or that, in between, an Arkansas governor would be president and eight years after leaving office, would campaign for his wife’s presidential bid? Long-time Soviet leader Leonid Brezhnev died that year, at the height of the cold war. Who foresaw that the stunning breakup of the Soviet Union would come just nine years later?

Were you aware of the momentous shift in information transmission protocols that would lead a few years later to the Internet? Even if you knew, could you have predicted the vast societal changes it caused? Did any of us imagine the development of cell phones, e-mail, iPods, laptop computers, or cloning?

The U.S.stock market was in miserable shape in 1982, having suffered a long-term bear market—punctuated by occasional upturns—for 15 years.  The Dow Jones Industrial Average stood at 777 on Aug. 12, 1982, inflation was high, interest rates were stifling growth, and unemployment was rampant. At that point, who predicted that we were at the start of an 18-year super-bull market that would peak with the Dow at 11,723 by early 2000? Or that the recovery from a brutal bear market from 2000-2003 would push the Dow to 14,000 earlier this year?

An investor who had $10,000 in via a fund that replicated the Standard & Poor’s 500 Index would have seen it grow to nearly $265,000 by this past summer’s highs, despite several intervening stock market crashes, twoU.S.wars inIraq, the 2001 terrorist attacks, and numerous other economic and political setbacks. Keeping that $10,000 in short-term bank deposits instead would have resulted in a nest egg of just $35,000.

No one knows if we are in a long-term bear market now, with brief upturns in between, a long-term bull, or something else. Our ability to know the future is very limited. A prudent investor will diversify and stay the course for the long term.