Are Stocks Still the Best Investment for the Long Run?

I’m sure many of you are familiar with the well-known stat that the stock market has returned, on average, 10% a year going back over 200 years. The tricky part is that that’s over the long-term. Any investor over the last ten years has experience the bad side of the long-term.

This weekend’s Wall Street Journal had an interesting article looking at the research used by Professor Jeremy Siegel who’s most closely identified with the argument for long-term stock ownership.

The problem with the data is that the original researchers only used a handful of stocks to represent the entire market for the early part of the 19th century. As a result, they probably got a very distorted picture of what was really happening.

The truth is that the market’s data up to about 1880 is very sketchy and in many cases, simply irrelevant. The long run argument still works for the last 125 years, but again, the problem is the wide swings.

Since the Fed was born in 1913, this is what we’ve seen:

1914 to 1929 Bull market +617%

1929 to 1947 Bear market -57%

1949 to 1966 Bull market +516%

1966 to 1982 Bear market -22% *

1982 to 1999 Bull market +1409%

Since 1999 (Bear market) -30% *

All figures based on the Dow Jones Industrial Averages. Declines in 1966-82 and since 1999 are much worse after adding the erosion of inflation.

Not exactly smooth sailing, is it? The bottom line is that specific financial and policy blunders in 1930, 1964-65 and 1999 led to the dramatic market declines. On the positive side, some particularly enlightened policies in 1948 and 1982 led to the dramatic market surges. The good guys are GATT in 1948 and supply side tax cuts and Volcker in 1982. The future is not locked in stone! The decisions President Obama, Congress and the Fed make in the next year or two will determine if we have 10 more bad years, or maybe one more bad year.

Since corporate bond yields are still so high, I think it’s very likely that corporates will continue to outpace the overall market for some time. Naturally, this doesn’t include my favorite stocks. In fact, my Emerging Growth Buy List beat the S&P 500 again for the first six months of this year. In 24.5 years, my Buy List is up over 2,300%! At the end of the year, The Hulbert Financial Digest should rate us #1 for overall performance over the last 25 years.

Now that’s investing for the long-term!

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