Long Run Return of Stocks
November 3, 2008
Will stocks pay off in the long run? This question is the most relevant in the current market meltdown. Statistics show stocks have paid off in the past, but it all depends on how long you're willing to wait.
Jeremy Siegel’s1994 book "Stocks for the Long Run" sealed the conventional wisdom that most of us should be in the stock market. Stocks are less likely to lose money over time, after inflation, than bonds are. He thinks that stocks in general are the way to go for buy-and-hold investors. Siegel warns that the constant pursuit of growth, by buying hot stocks or sectors or seeking out the next big thing, dooms investors to poor returns. He emphasizes that over the long run, investors can accrue a little better return on the market by focusing on dividend payers.
What many investors have failed to realize is that "the long run" can sometimes be very, very long. So says London Business School economist Elroy Dimson, co-author with his LBS colleagues Paul Marsh and Mike Staunton of the 2002 book Triumph of the Optimists.
Stock prices often fail to keep up with inflation. It took 16 years for U.S. stocks to emerge from negative real-return period, which ranged from 1905 to 1920. The climb back into the black after a fall can take even longer outside the U.S. In Italy, stocks failed to keep up with inflation over a 73-year period through 1978.