Carl Richards

Part of the investor’s dilemma is that no matter how much data we have about the past, we have no data for the future. No matter what history says about the long-term, upward trend of the stock market, we still don’t know for sure what the future will bring.

So after all the spreadsheets are put away, investing becomes a matter of faith.

This act of faith is most evident when it comes to the stock market. Assuming you’re invested in something like a basket of diversified index funds, the core question becomes this: do you still believe that stocks will continue to do better than bonds, and bonds will continue to do better than cash, just like they always have?

If you approach investing from the perspective of the historical evidence, then temporary declines, no matter how terrifying, are just part of the deal. While this doesn’t make investing easy, it does make it easier. One of the biggest risks to investing in the stock market is getting scared out of it at the wrong time. Avoiding that deadly mistake is easier if you believe that at some point things will turn around, because they always have.

Approaching investing based on the data from the past doesn’t require you to ignore the tough economic challenges we face. It just requires that we believe we will find a way through them. I have no idea how we are going to deal with the massive public debt, the problems in Europe, and everything else CNBC is throwing at us, but I do believe that we will get through it.

This reminds me of a quote from the British abolitionist, politician and historian Thomas Babington Macaulay. Keep in mind that this was written in 1830:

We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all before us, and with just as much apparent reason… on what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?

In some regard, investing based on the weighty evidence of history is the most prudent thing we can do. So far it has always proven to be correct. Every time someone has predicted the death of the stock market, they have been wrong. Given this record, isn’t it reasonable to assume that stocks will continue to be better than bonds, and that bonds will continue to be better than cash?

Article source: http://feeds.nytimes.com/click.phdo?i=21849041a9091b14c01fdcb02df7acf2