Study by Lubos Pastor and Robert Stambaugh Questions Buy and Hold
Last week Cheryl Casone of Fox Business News interviewed University of Chicago Booth School of Business professor Lubos Pastor regarding a 450 page study of over 200 years of stock market data he performed with Robert Stambaugh of the University of Pennsylvania which called into question the popular notion of buying and holding equities for the long run. Pastor was at the forefront in developing improved index funds a couple of years ago [link]. Pastor also made news last year when he challenged conventional wisdom that stocks are best for the long run [link].
The new research study by Pastor and Stambaugh, soon to be published in the Journal of Finance, indicates that the risk of holding equities does not necessarily decline over time.
In the interview with Fox (see below), Pastor said in the past buy and hold has worked well. However, when he and Stambaugh looked at forward-looking estimates of volatility it suggested stocks were more volatile in the long run.
Casone read some notes from the study showing that over a one year time horizon stocks show 17% volatility, while over 30 years investors in stocks face 21% annual volatility, and over 50 years investors are subjected to 23% annual volatility.
Pastor stated, “investors looking into the future don’t only buy the historical estimates, but also buy the uncertainty associated with those estimates, and the uncertainty compounds with time.”
Pastor warned that their conclusions are only based on the 206 years of data and he is certainly not giving advice on whether investors should reduce their equity holdings. He is only pointing out that buying and holding stocks is riskier than conventional wisdom suggests.
Casone pressed Pastor for reasons why his report is at odds with work by others such as Jeremy Siegel. Pastor continued by commenting on mean reversion and uncertainty about the equity premium. Uncertainty about the equity premium trumps mean reversion in the long run, he added.
Side notes from Pastor and Stambaugh’s report shown in the video: the average historical return in the 20th century includes good luck and its not clear we’ll have the same productivity growth in the future.