Barrons Makes A Long Term Case For Equities
Case Closed: Stocks Work {Excerpt}
By GENE EPSTEIN
By GENE EPSTEIN
Special Report: Investing for Retirement -- If past is prologue, returns over the next five and 10 years will be better than average -- so don't give up yet.
THIS YEAR MARKS THE 30TH ANNIVERSARY of a famous Business Week cover story "The Death of Equities."...But starting around that time, investors could have beaten inflation quite handily by snapping up stocks and holding them for five or 10 years. Buying the stock market at the close of 1979 would have yielded, after inflation, an average annual return of 7.3% over the next five years. An even higher five-year return of 9.47% could have been captured by going long at the end of 1978. The 10-year performance would have been healthier still, yielding 9.52% or 10.75%, depending on whether the investor bought at the close of '78 or '79....
....With the stock market in the throes of yet another near-death experience, another rebirth could be in the offing.....{B}ased on the historical record, performances like these bode well for the next five to 10 years....THE HISTORICAL RECORD SHOWS that for 20- and 30- year periods, inflation-adjusted returns on stocks have never been negative. Over the 137 years from 1871 through 2008, returns after inflation for 20- and 30-year intervals have been consistently positive. ...
...With this consistently strong performance over long periods, it stands to reason that below-par returns over five- and 10-year intervals would tend to be followed by much better results over the subsequent five- and 10-year intervals....An investor whose retirement is drawing near might take heed: Investing in stocks today could help produce the cash you will need five or 10 years down the road.....
....Critics of stocks as vehicles for retirement often rig their case by assuming that investors entered and exited with the worst possible timing, buying at peaks and liquidating at bottoms. But diversification over time -- buying and selling periodically, rather than all at once -- can be quite effective....
And of course, retirement accounts are set up in such a way that buying can occur in installments over many years. The acquisition of stocks can therefore be diversified over time, along with the process of liquidation.....
{Professor Jeremy} Siegel has analyzed..data in terms of "total returns" after inflation. All publicly traded stocks are bought on a capitalization-weighted basis, with all dividends reinvested. Average annual returns benefit from the magic of compounding. Thus, for example, $1 invested at 6.26% over 30 years becomes an inflation-adjusted $6.13 with compounding. For any given holding period from year-end close to year-end close, no taxes are assumed -- not unrealistic, given the advent of tax-deferred accounts. Perhaps a tad unrealistically, management fees aren't factored in, either. But in the era of index funds and exchange-traded funds, such fees are lower than ever. Some ETFs charge as little as seven one-hundredths of a percent.
THIS YEAR MARKS THE 30TH ANNIVERSARY of a famous Business Week cover story "The Death of Equities."...But starting around that time, investors could have beaten inflation quite handily by snapping up stocks and holding them for five or 10 years. Buying the stock market at the close of 1979 would have yielded, after inflation, an average annual return of 7.3% over the next five years. An even higher five-year return of 9.47% could have been captured by going long at the end of 1978. The 10-year performance would have been healthier still, yielding 9.52% or 10.75%, depending on whether the investor bought at the close of '78 or '79....
....With the stock market in the throes of yet another near-death experience, another rebirth could be in the offing.....{B}ased on the historical record, performances like these bode well for the next five to 10 years....THE HISTORICAL RECORD SHOWS that for 20- and 30- year periods, inflation-adjusted returns on stocks have never been negative. Over the 137 years from 1871 through 2008, returns after inflation for 20- and 30-year intervals have been consistently positive. ...
...With this consistently strong performance over long periods, it stands to reason that below-par returns over five- and 10-year intervals would tend to be followed by much better results over the subsequent five- and 10-year intervals....An investor whose retirement is drawing near might take heed: Investing in stocks today could help produce the cash you will need five or 10 years down the road.....
....Critics of stocks as vehicles for retirement often rig their case by assuming that investors entered and exited with the worst possible timing, buying at peaks and liquidating at bottoms. But diversification over time -- buying and selling periodically, rather than all at once -- can be quite effective....
And of course, retirement accounts are set up in such a way that buying can occur in installments over many years. The acquisition of stocks can therefore be diversified over time, along with the process of liquidation.....
{Professor Jeremy} Siegel has analyzed..data in terms of "total returns" after inflation. All publicly traded stocks are bought on a capitalization-weighted basis, with all dividends reinvested. Average annual returns benefit from the magic of compounding. Thus, for example, $1 invested at 6.26% over 30 years becomes an inflation-adjusted $6.13 with compounding. For any given holding period from year-end close to year-end close, no taxes are assumed -- not unrealistic, given the advent of tax-deferred accounts. Perhaps a tad unrealistically, management fees aren't factored in, either. But in the era of index funds and exchange-traded funds, such fees are lower than ever. Some ETFs charge as little as seven one-hundredths of a percent.
JEREMY SCHWARTZ, RESEARCH director of WisdomTree Asset Management -- a firm with which Siegel is affiliated -- updated Siegel's figures at Barron's request. We asked him to line up the worst-performing quartile of 10-year stretches since 1971 and then see how the following 10 years performed in each case. That meant examining about 30 intervals of poor performance. The result: In each case -- without exception -- the subsequent 10-year periods performed better and ran positive. The median performance for each was 8.17%, 1.33 percentage points higher than the median for all 10-year intervals.
Schwartz performed the same exercise for the worst quartile of five-year returns. Here the finding was that, in 25 out of the 31 cases, the subsequent five-year periods performed better and ran positive. The median performance for all these cases was 9.47%, 2.50 percentage points higher than the median for all five-year intervals.
Prof. Siegel also compares long-term equity performance with returns in U.S. Treasury bonds....Assuming buy-and-hold strategies in Treasuries over 20- and 30-year intervals, how often did the inflation-adjusted income and possible capital gains from bonds prove superior to the returns of stocks?
Answer: Through 2008, stocks have always done better than Treasury bonds over 30-year periods. And over 20 years, stocks bested Treasuries in all but a little over 5% of the cases.....Why do stocks tend to do better over the long run than either bonds or inflation? Mainly because their returns are driven by rising profits -- which in turn are driven by real growth in the U.S. economy.
posted by CR English at 10:31 AM
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