In my last column, I noted that – over periods measured in decades – nothing has outperformed a diversified portfolio of stocks.
Not cash, bonds, real estate, commodities or precious metals.
And, in case you were wondering, it hasn’t been close.
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 $39.43 at the end of 2021.
The same dollar invested in T-bills would have grown to $5,069.
A $1 investment in bonds would have been worth $20,321.
And $1 invested in common stocks with dividends reinvested would have turned into $18.7 million.
The odds are good, of course, that you weren’t around a couple hundred years ago.
And unless something exciting happens soon in the field of cryogenics, you won’t be around 200 years from now either.
However, it’s not necessary to think that long term.
Start at any point in history and you’ll find that when measured in decades the investment returns for different asset classes are remarkably consistent.
Since 1926, the stock market has generated a positive return in 70 out of 95 years.
Although it’s pretty safe to assume given this year’s market that 2022 is not going to make it 71 out of 96.
The inevitable down years quickly take the fun out of the stock market for most investors.
Since 1945, the S&P 500 has tumbled 26%, on average, in the periods leading up to and during recessions.
History shows that bear markets last about nine months, on average.
(To put things in perspective, the S&P 500 is down 25% in 2022 and the market has declined for nine months.)
Market pullbacks often drive investors to the sidelines, where they miss the ensuing rally.
Running to cash whenever a recession looms might be a fine idea, if only recessions were predictable.
They’re not. Statistics show that recessions tend to be identified weeks or months after they begin.
By the time headlines confirm that a recession has arrived, the damage in the stock market is usually done.
However, even if you somehow knew what was going to happen in the economy, you still wouldn’t know what will happen in the stock market.
Perversely, stocks often fall during the good times and rally during the bad times.
Billionaire manager Ken Fisher doesn’t call the stock market “The Great Humiliator” for nothing.
Even if you make a good call and get out of the market before a downturn, how do you know when to get back in?
Wait too long and you can miss a substantial part – or all – of the next bull market.
That can be costly. Especially since, historically, the odds of making money in the U.S. stock market are quite good.
Throughout history the market has gone up half the time in one-day periods, 68% of the time in one-year periods, 88% of the time in 10-year periods and 100% of the time in 20-year periods.
This should not surprise you.
Stocks are not simply slips of paper with corporate names on them. A share of stock is a fractional interest in a business.
When a corporation issues stock, it is offering each purchaser the right to share in the fortunes of the business.
The basic premise for owning stocks is the conviction that corporate sales and profits will grow.
Not every quarter or every year necessarily, but over the long haul.
Why? Well, for starters, people everywhere have economic wants and needs: food, clothing, shelter, cars, phones, computers, etc.
It is business – not government – that fills those needs.
As long as there are human beings, there will be economic needs.
And as long as there are self-interested individuals, a certain percentage will start or run businesses to meet those needs.
The most successful businesses will appreciate in value the most.
And it is less risky to own several profitable businesses than just one.
This, in a nutshell, is the case for owning a diversified portfolio of stocks.
Yes, there is risk in the short term. But over the long haul? It’s a pretty safe bet.