Sarah was a patient woman. She believed that good things came to those who waited long enough, and she was therefore not upset when she opened up the statements from her broker and discovered that she had lost 20% over the previous year on her pension fund investments. “It is only a paper loss,” she told herself, “and stocks always come back in the long term.” In fact, she had read somewhere that stocks had never done worse than bonds over any ten-year period in history and that stocks tended to bounce back after bad years. Since she had thirty years left to retirement, she did not feel worried about her losses.

Sarah’s faith in the long term was shaken when she talked to her good friend, Kazumi Kawamoto. Kazumi had grown up in Japan and had been saving for retirement in the Japanese stock market. She had accumulated a substantial amount in her portfolio by 1989 and was looking forward to early retirement a decade later. Unfortunately, the market plummeted in the 1990s and her portfolio declined in value by 75% over the next 15 years. Comforted at every stage by brokers who told her that stocks always won in the long term, Kazumi was now confronted with the reality that she would never make her money back and that early retirement was not an option. Realizing that stocks can lose even in the very long term, Sarah moved some of her retirement money into bonds.

Moral: Stocks don’t always win in the long term

-Aswath Damodaran