Editor’s Note: In today’s article, Alexander Green highlights the asset class that is foundational for any investor seeking to generate high returns with an acceptable level of risk.
But he doesn’t stop there…
He notes that when you reinvest dividends when stocks are down, future returns are supercharged.
For example, investors who bought just before the stock market crash in 1929 and reinvested their dividends were made whole again in just 4.5 years.
The moral of the story? Over the long haul, the stock market goes in one direction – UP.
To learn more about the power of reinvesting dividends – especially in a down market – check out Chief Income Strategist Marc Lichtenfeld’s completely FREE Ultimate Dividend Package.
– Madeline St.Clair, Assistant Managing Editor
If you’re just tuning in, I’ve spent the last several columns explaining how everyday men and women can generate a seven- or eight-figure net worth.
Even if they’re starting from zero.
I’ve done it – and so have millions of other Americans.
Last year the Federal Reserve announced that U.S. household net worth hit a record $141.7 trillion.
Spectrem Group reported that approximately 1 in 8 American households has a net worth of more than $1 million.
How did they do it? The stories vary, but their methods are remarkably similar.
Most Americans with a net worth of a million dollars or more maximized their income, lived within their means, saved regularly, invested smartly and let their money compound for years – if not decades.
Over the last few columns, I’ve covered how to maximize your income, increase your savings and adopt the prosperity mindset of the world’s best investors.
But where should you put your money to work, in stocks, bonds, cash, gold, commodities, real estate?
You should spread your risk across all these asset classes.
But over the long haul, nothing has rewarded investors more than a diversified portfolio of common stocks.
That’s why The Oxford Club recommends them. The outperformance is not trivial.
Jeremy Siegel – a professor of finance at the Wharton School of the University of Pennsylvania and author of Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies – has done a thorough historical study of the returns of different types of assets over the past couple hundred years.
What he discovered is dramatic: $1 invested in gold in 1802 would have been worth $90.05 at the end of 2021. The same dollar invested in T-bills would have grown to $4,437. A $1 investment in bonds would have been worth $36,390.
And a single dollar invested in common stocks with dividends reinvested – drumroll, please – would have been worth over $45 million.
Just look at the massive moves in the graph below…
The odds are good, of course, that you weren’t around a couple hundred years ago.
And, unless something truly exciting happens soon in the field of cryogenics, you won’t be around 200 years from now either.
However, it isn’t necessary to think that long term.
History Is Our Greatest Teacher
Look back through history and start whenever you choose. You’ll find the rolling returns for different asset classes are remarkably consistent.
And equities win in a landslide. Since 1926, the stock market has generated a positive return in 71 out of 96 years.
Historically, the odds of making money in the U.S. stock market are 50-50 in one-day periods, 68% in one-year periods, 88% in 10-year periods and 100% in 20-year periods.
(That’s something to remember whenever stock prices start wilting like last week’s roses, as they have lately.)
Stocks are not simply red or green electronic blips – or sheets of paper with corporate names on them.
A share of stock is a fractional interest in a business. When a company issues stock, each purchaser has the right to share in the fortunes of the business.
The gangbuster returns from equities surprise some folks, especially those listening to the permabears.
For instance, a reader recently forwarded me this excerpt:
Stocks hit a high in 1929, after which investors waited 27 years (inflation adjusted) for a new high. Measured from the bottom, in 1932, prices rose for 34 years to reach the next top, in 1966.
Then, it was down again, with investors in a losing trade for the next 29 years. Finally, in 1995, the Dow traded once again (inflation adjusted) at levels last seen in 1966.
Sounds scary. However, it’s highly misleading.
Why? Because by looking at the level of the index only – and omitting dividends – it grossly distorts actual returns.
It’s like citing the historical returns on bonds while leaving out the interest payments.
During the periods mentioned in the excerpt above, stocks often yielded over 8%.
When the market hit bottom in 1932, they yielded over 14%.
And when you reinvest dividends when stocks are down, future returns are supercharged.
Even if they bought at the very top before the 1929 crash, it took just 4.5 years for investors reinvesting dividends to be whole again.
Yes, many panicked and sold at the time – or went broke on margin. But that’s a lesson about human behavior, not historical equity returns.
This “losing trade” – a diversified portfolio of stocks with dividends reinvested – has outperformed every other asset class for over 200 years.
No one can tell you what stocks will return in the future, of course.
But it’s reasonable to expect that long-term returns will not be significantly higher or lower than historical averages.
As Patrick Henry famously said, “I know no way of judging the future but by the past.”
“The past” I’m referring to is not the last couple weeks or months… but the last couple centuries.
No asset class has returned more than stocks over the long haul.
That makes them foundational for every investor seeking to generate high returns with an acceptable level of risk.
Click here to watch Alex’s latest video update.