Stocks for the Long Run – 4 Important Takeaways, Part 1

July 07, 2020
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One of my favorite investment books is “Stocks for the Long Run” by Jeremy Siegel. The book uses historical data going back to 1802 to make a case for owning stocks, despite their risks. It was originally published in 1994 and he has since made several editions, usually a few years after a recession to reassure his readers that in fact his advice has not changed despite a changing investment environment.

 

I’ll admit the book can be a bit dense so I wanted to expand on 4 important takeaways from the book to save you some time.

 

Part 1 - Stocks have historically been less risky than bonds over long time horizons

 

I know that may be surprising to hear. Jeremy explains that for most investors, the best way to measure risk is to examine what the worst-case scenario could be. To do this he examines the best and worst after-inflation returns for stocks, bonds, and T-bills from 1802-2012.  Stocks were measured as dividends (plus capital gains) on a broad based capitalization-weighted index of U.S stocks.

 

Not surprisingly, stocks were considerably riskier over short time frames.

 

 

1 Year Worst Annualized Return

5 Year Worst Annualized Return

Stocks: -38.6%

Stocks: -11.9%

Bonds: -21.9%

Bonds: -10.1%

T-Bills: -15.6

T-Bills: -8.3

 

However, when the time horizons got longer, the worst case scenario for stocks not only was better than bonds or T-bills, it was actually much easier to predict what those returns might be. 

 

10 Year Worst Annualized Return

30 Year Worst Annualized Return

Stocks: -4.1%

Stocks: 2.6%

Bonds: -5.4%

Bonds: -2.0%

T-Bills: -5.1

T-Bills: -1.8%

 

During the 30 year time periods the best annualized return was 10.6% vs. 7.8% for bonds. So the range of returns for stocks was 8% while the range of returns for bonds was nearly 10%. According to Mr. Siegel’s data, stocks actually produced more predictive after-inflation returns over 30 year time horizons!

 

 

Disclaimer: Mention of any author, their publications and materials does not constitute endorsement or recommendation.  We do not assume responsibility for the validity of cited references or the consequences of their use.  All references to bonds refers to US long-term government bonds and all references to stocks refers to dividends plus capital gains on a broad based capitalization-weighted index of U.S stocks.  Alex Voorhees and Reston Wealth Management do not provide legal, accounting or tax advice. This information is not intended to be a substitute for specific individualized investment, tax or legal advice. We suggest that you discuss your specific situation with a qualified investment, tax or legal advisor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to investing. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing. You cannot invest directly in an index.

 

 

Citations

Siegel, Jeremy J. Stocks for the Long Run: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies. McGraw-Hill Education, 2014.