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I CAN SHOW YOU SOME CHARTS TO ARGUE the point, but I won't. Instead, I'll draw from what we can see in everyday life.
Now, if I were to use a chart, I would show the MSCI World Index. This is an index that measures the performance of stock markets around the world. With this chart, I'll be able to show you that if you take any 12-year period over the last 30 years (e.g., 1985 - 1996 or 1987 - 1998), you will find that they would all be positive. So if you had invested in a basket of stocks similar to the MSCI World, you would have make a profit of over any 12-year period.
Without using the chart, I'll just ask a simple question. Do you think that the world economy will be greater in 12 years than it is today? I think most of us will answer yes. Most of us believe that world population will be greater in 12 years. this will lead to an increase in overall consumption demand, which will mean that companies will be producing more, selling more and making more profits. With greater profits, stock prices and stock markets will rise.
Is population growth the only driver? No. Besides growing in numbers, human beings are always demanding a better standard of living, what's commonly know as 'upgrading' in Singapore (e.g., we live in a government flat, and we upgrade to a larger one). This "upgrading" demand adds to consumption demand.
As markets like India and China open up and grow economically, the people there will have higher incomes. They will start with demanding the basic necessities (like on TV and one radio). But as their incomes grow, they will naturally purchase more and better products (like 2 Plasma TVs, and 2 digital hi-fis).
Businesses are also drivers, as are governments. These entities consume a wide range of products and services and contribute to overall demand.
But businesses and governments are made of people as well, and their reason for being is to serve people. So the very fundamental driver of world economy, and the very basic assurance that you can have that world stock markets will continue to grow in the long term is this: That as long as human populations grow, and human beings continue to demand better standards of living, overall demand will increase and companies will sell more products and services. This will lead to greater profits and higher share prices.
So we have confidence that the world economy will grow in 10 - 12 years time. But will the world economy grow next year? That is harder to predict. The world economy could decline next year. Companies could be faced with less demand for their good and services and generate less profits. There are many causes for this. There could be an oversupply of something (like homes in the U.S., leading to falling home prices, and less profits for homebuilders and other manufacturers and retailers who sell products that go into homes). There could be some kind of geo-political shock that makes people worried about the future and hold back their consumption. Prices of raw materials such as oil can go up so much that it works like a tax on disposable income, limiting consumption. And so forth. These things may affect company profits negatively and cause equity prices to slide or become very volatile.
This is why investing in equities in the short term is risky. It's hard to predict how things will be over the next year or so.
What about investing in only one market? If you put all your money in Thailand today, would you expect that in 12 years time you will definitely make a profit? That is harder to say also. Whilst there are many good reasons to believe that Thailand will continue to grow, you can never be sure. Many single countries have faced declines and major disruptions before such that their economies do not grow over a lengthy period of time.
So when you look at the short term, and when you look narrowly at a single market, you cannot be certain that you will make a profit. But if you have a globally diversified portfolio and you are able to invest for the long term, you can be sure (because the world economy grows all the time). If you do things like dollar cost averaging (from regular investing), and constantly rebalancing, you returns will be further enhanced. Based on the above argument, you may ask: what about things that cause human populations to decline, like terrorist attacks, war and disease? Won't that cause overall demand to go down and the world economy to decline?
Yes, they will, particularly in the short term. But they have to lead to a permanent and constant decline in human populations for the world economy to decline over time. If they are temporary, their effects will be temporary.
Let's look at some examples in history. Know how many people died in World War II? It's a staggering number: 55 million people (again, that's not a typo, its 55 million). An influenza outbreak in 1918 killed an estimated 30 million people across Europe. Smoking kills about 5 million people every year. These numbers are huge compared to the numbers that have been killed in recent terrorist attacks, the Iraq war and SARS. While these events persisted, the world economy was in bad shape, but they don't last. And every time, human populations have grown and thrived.
So if you believe that human beings can continue to grow and thrive, then investing in stocks over the long term is certainly a low risk affair.
Now, let's look at fixed deposits and the kinds of beliefs we have about prices in the world. Again I can show you charts that will demonstrate that inflation has cause prices to go up over time, but I won't.
I will just ask you about your own experiences. You must definitely be able to relate to growing prices. 15 years ago, you can get a plate of chicken rice for $1.50. But now for a plate with the same amount of chicken, you would have to pay $3. If you had put $1.50 into a fixed deposit account earning 3% a year, and you do not take out the annual interest but put it back into the account to earn more interest, your $1.50 would be worth $2.27 after 15 years; clearly, not enough to pay for a plate of chicken rice with the same amount of meat.
Will prices grow over the next 15 years? Most of us will say yes. Will the returns from fixed deposits meet the increase in prices? Many of us will say no, or at least, we're uncertain. So it's risky to leave your money in fixed deposits, because it might be worth less than the amount you would have to pay for the same things over time.
Here I am comparing apples to apples and assuming that you still want to eat chicken rice in 15 year's time. If you tire of hawker food, and you want to 'upgrade' your lifestyle and eat chicken cutlets in a restaurant, you can be certain that your fixed deposit returns will not be able to keep pace.
Recently, someone who attended one of our investment seminars asked about the difference between investing and gambling. If you buy the reasoning above, then making a profit from investing in equities is a certainly, and you are not gambling at all. But if you keep your money in fixed deposits, and you do not know if the returns will keep pace with inflation, then you are taking a gamble. iFAST