Why Stock Investors Need to Look a Decade Ahead, at Lea

If you want to know exactly how the markets performed in 2021, and about what the experts believe will happen this calendar year, you’re in luck.

Brokerage and retirement account statements will soon be on their way, and Wall Street’s forecasts for 2022 are rolling in, along with earnest advice about how to manage your finances over the next 12 months.

This is the time for New Year’s resolutions, after all. Make some now about investing and you’ll be in good shape for the rest of the year.

Or so you might think.

The seasonal deluge of financial information fosters the illusion that the markets are governed by the annual calendar and that Wall Street experts have a good sense of where things are going. As I’ve pointed out recently, none of that is true.

As an investor, if you need to rely on a calendar, I’d make it a long-term one — at least until the year 2032.

Laszlo Birinyi, who began analyzing the market with Salomon Brothers back in 1976, said, “When the stock market rises or falls, it doesn’t care about the calendar or the month of the year.”

Mr. Birinyi now heads his own independent stock market research firm, Birinyi Associates, in Westport, Conn. He says stocks are in a bull market that should continue for a while. How long it will last, he doesn’t know, but he’s sure that whatever its duration, it will have nothing to do with the conventions of the 12-month calendar.

It makes sense to think in periods much shorter than one year if you’re a trader, he said, and much longer than that if you’re an investor.

Short-term trading has certainly been in vogue during the pandemic, with the surge of interest in meme stocks, like GameStop, Hertz and AMC Entertainment, in episodes of social media-generated frenzy that weren’t based on deep convictions about the stocks’ underlying value.

Mr. Birinyi recommends a far more disciplined approach, making long-term investments when they seem compelling and tactical trades when prices tell him to buy or sell.

“I look for secular changes in the world,” he said. “For example, a few decades back, the word ‘Google’ became a verb. There was a sea change.” He was an early investor in tech stocks like Google (now Alphabet) and Apple and has held them as strategic investments.

He makes short-term moves, too. “I view a company like Home Depot as a trade,” he said, and will move in and out of such stocks opportunistically.

But for most people — who lack the skill or inclination to be successful traders or stock pickers — the simple advice of John C. Bogle, the founder of Vanguard, is compelling. He died in 2019 at the age of 89, and said to the very end that investors should think at least 10 years ahead and preferably much longer.

Mr. Bogle (Jack, as I always called him) was the apostle of low-cost, diversified stock and bond mutual fund investing, mainly through index funds, which he invented in their first commercially viable form. Such funds are inherently cheap to run, he said, because they merely mirror the market and keep trading costs to a minimum. They can’t beat the best-performing stocks and bonds over the course of one year, he said, but they will prevail over the long haul for investors who can avoid the kind of short-term thinking that Wall Street’s annual investment cycle promotes.

Why is a year merely a blip in time, from an investing standpoint? He explained why in “The Arithmetic of ‘All-In’ Investment Expenses,” a carefully researched 2014 article in the Financial Analysts Journal.

The article pointed out the peril inherent in Wall Street marketing — including annual forecasts — that focuses attention on short-term returns. Unless you think over longer time spans, you may not appreciate the harm being inflicted by excessive investment fees. A seemingly small annual difference of 2.2 percentage points in costs can cut roughly 40 percent of your retirement savings over 40 years, he calculated.

That’s because the math shows that it’s not only profits that compound over time. Costs, do, too. Investors need to watch out for themselves, unfortunately. Mr. Bogle warned that the costs of stock trading and investment fees can easily ruin your prospects for a comfortable retirement.

While the past provides no guarantees for the future, it suggests a course of action: holding stock index funds for their higher returns and bond funds for reliability and for offsetting the ups and downs of the stock portfolio. How much and what kinds of each — the fancy name for this is asset allocation — are critical and individual questions.

An investor in her 20s, who could well be in the work force until 2072, might want to put 100 percent of her investment money into a broad stock market index fund and just add to it year after year. Consider that since the start of 1976 (when Vanguard began marketing the first index fund), the S&P 500, including dividends, has returned more than 18,000 percent.

I’d also invest outside the United States. Economic power is becoming increasingly dispersed. For the rest of this century, global investing, including allocations to emerging markets, seems essential for a truly diversified portfolio.

Over the decade ahead, according to Vanguard’s projections, neither stocks nor bonds are likely to exceed single-digit returns, largely because most securities are already expensive. Vanguard expects that stocks outside the United States are likely to do better than domestic ones, and bonds are expected to lag stock returns by two to three percentage points annually.

If your horizon is short, you may need to cut investment risks by paring down on stocks. The decision is personal. My own idiosyncratic portfolio’s allocation is somewhere close to 60 percent stocks and 40 percent bonds.

Because I may need to tap some of that money before 2032, I hang on to a substantial dollop of bonds, even though this has been a mediocre stretch for them. The iShares Core US Aggregate Bond ETF, which tracks the investment grade U.S. bond market, lost 1.8 percent last year — trailing the returns of the Vanguard S&P 500 ETF, which tracks the S&P 500 stock index, by a whopping 27 percentage points.

This year could well be worse for bonds, if the rate of inflation keeps rising and interest rates spike. (Bond prices and interest rates move in opposite directions.)

“Bonds are still very worthwhile, but right now, there’s no getting around it: You’re paying a high price for holding them,” said James Paulsen, chief investment strategist for the Leuthold Group, an independent stock research firm in Minneapolis.

In a conversation this past week, he suggested that even risk-averse investors may want to increase their stock allocation modestly. Perhaps emphasize dividend-paying stocks, because they may fare better than the overall stock market in a decline, and small-cap stocks, precisely because they have lagged the S&P 500 and may be comparatively cheap. Adding stocks probably means bearing higher risks in a down market, however.

There’s no perfect solution, but there are promising paths. If you do want to make a New Year’s resolution about investing, it may be to cut costs, diversify and take as long a view as possible. The year 2032 isn’t far away. If you can, go much longer than that.