A. We used to think 10-year is long enough in investment evaluations, however, a recent paper by Eugene Fama and Kenneth French in the Financial Analysts Journal shows that even over 10-year periods – stock market volatility is great enough that there’s still a material risk that a superior strategy or factor will underperform.
For instance, their analysis suggests that otherwise-long-term-outperforming value strategies still lag in 9% of randomly created 10-year investment horizons using historical data… implying that the underperformance of value over the past decade is still well within the range of normal statistical noise (and not necessarily a signal that value investing itself has lost its value).
Another example, given their even-higher volatility, there is a 24% that small-caps will underperform over a 10-year cycle (even when assuming their historical return premium is persisting), and a 16% chance that stocks will underperform Treasuries (even if their historical equity risk premium remains valid).
On the one hand, the important implication of the research is that even 10 years is not necessarily long enough to determine if a manager (or a factor) has lost its ability to outperform. On the other hand, when the researchers also find that even over 20 years, there’s an 8% chance that equities will underperform Treasuries despite the equity risk premium… the question arises as to how long do you need to evaluate an investment strategy and asset class' performances?