Professional Documents
Culture Documents
By Patrick McDevitt
published on BNET.com 3/19/2009
In 1994 Jeremy Siegel wrote the best-selling book Stocks for the Long Run. In it, he demonstrated
that stocks had been the best-performing asset class over the prior 120 years. It wasnt even close. Of
course, stock returns were highly volatile in the short term, but Siegel showed that over longer holding
periods, the range of the stock markets annual returns narrowed considerably.
Then came the recent stock market meltdown, which resulted in stunning losses for stocks. The
losses have been so large, in fact, that in the 20 years that ended March 2009, the S&P 500s 7.4
percent annual return has lagged the 9.4 percent return that long-term Treasury bonds provided. No
wonder many erstwhile believers in Siegels stocks for the long term gospel are asking: Were we
snookered?
Key Stats
Theory: Stocks become less risky over the long run, and the longer you hold them, the more likely you are to
outperform bonds.
Believers: Author Jeremy Siegel, thousands of investment managers, millions of investors
Critics: Zvi Bodie, Paul Samuelson, Jeremy Grantham
Reality: Stock returns have lagged bond returns by 2 percent per year for the 20 years ended March 2009.
What you can do: Dont swing for the fences. Set a strategic asset allocation you can live with through good
times and bad. Dont rely on a long holding period to bail you out. Consider tweaks to your stock allocation if
valuations get extreme.
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2. Over holding periods of 10 years or more, the volatility of their annualized returns greatly
declined;
3. Therefore, stocks are less risky if you plan to hold them for a long period of time a theory
known in academic circles as time diversification. According to this theory, stocks were an
anomaly. They provided higher long-term returns with lower long-term risk.
These experts were preaching to an ever-expanding flock. Led by the growing adoption of IRAs and
401(k)s, and the tremendous bull market of the 1990s, Americans embraced equity ownership. From
1983 to 1989, the share of American households owning stocks more than doubled, from 19 percent
to 39 percent. By 2001, that figure reached 57 percent. Millions of investors ramped up their stock
allocations, convinced that a long time horizon and stocks inevitable outperformance would richly
reward them.
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And of course, its folly to believe that past returns represent the limits of future performance, because
anything can happen in the stock market. A 35-year-old investor is likely in the accumulation stage for
only one full 20-year period. If you reach age 55 with your portfolio in tatters, its cold comfort to know
youve experienced a historical anomaly.
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