STOCKS FOR THE LONG RUN: A GUIDE FOR SELECTING MARKETS FOR LONG-TERM GROWTH
By Jeremy J. Siegel
Irwin x 318pp x $25
There's a certain twinge of guilt that people in their middle years know well. Old enough to have savings but not ready to retire, they've been told over and over that the best way to ensure a prosperous old age is to invest most of their money in the stock market. But few follow this advice: When it comes down to it, the stock market seems too risky, too prone to crashes, just too speculative. That's why many Americans put their hard-earned funds into "safer" but less lucrative fixed-income securities or even money-market funds.
If Jeremy J. Siegel's new book, Stocks for the Long Run: A Guide to Selecting Markets for Long-Term Growth, doesn't persuade them to move more of their nest egg into stocks, nothing will. Siegel, a professor of finance at the Wharton School and academic director of the Securities Industry Institute, makes an utterly convincing case that the stock market not only pays higher returns than the bond market but is also, contrary to what most people believe, less risky over time.
Stocks for the Long Run is an uneven mixture of sober economic analysis, hosanna to the stock market, and prosaic introductory investment guide. What makes it stand out is Siegel's analysis of the long-range pluses and minuses of investing in stocks, a subject on which he is one of the world's leading experts. Siegel's position is especially credible because of his historical perspective. While most such analyses date from the 1920s, Siegel has compiled data going back to the early 1800s.
His basic argument: Even though the stock market is more volatile than the bond market year by year, over every 30-year period since 1871, stocks have done better than bonds. Based on past performance, a 40-year-old who's socking money away for retirement can expect higher returns from the stock market or from a stock-index fund that replicates the behavior of the larger market. Even over any 10-year period, Siegel reports, stocks have outperformed bonds 82% of the time.
Siegel hammers home the point by observing that, adjusted for inflation, stocks have never lost money over a period of 20 years or more. By contrast, there have been several long stretches--most recently from 1961 to 1981--when an investment in Treasury bonds was a losing proposition.
Stocks also have higher payoffs. Writes Siegel: "Over the last century, accumulations in stocks have always outperformed other financial assets for the patient investor." Assuming that dividends and capital gains were reinvested, an investment in the stock market between 1966 and 1992 averaged a 4.2% annual return after inflation. A similar investment in long-term government bonds yielded a mere 1.6%. Taking taxes into account makes the contrast even more striking: Siegel calculates that an investment in the stock market would have gained 1.8% annually, while an investment in bonds would have actually lost 1.7% each year.
"Even such calamitous events as the Great 1929 Stock Crash did not negate the superiority of stocks as long-term investments," writes Siegel. Indeed, he opens his book with a fascinating anecdote showing how an investor who had the stomach to hold on to stocks through the Great Crash would have ended up doing much better than someone who invested only in bonds. And on a long-term chart of stock-market values, Siegel shows us, the crash of 1987 was nothing but a blip, erased within two years.
What about a worker who doesn't have 20 or 30 years before retirement? The last chapter of Stocks for the Long Run contains an extremely useful table showing the optimal amount of stock to hold for different periods of investment and different levels of risk tolerance. For example, Siegel calculates that conservative investors with a 10-year time frame should hold 62% of their portfolios in stocks.
Sometimes, Siegel's true-believer tone weakens the impact of his analysis. "The surprising constancy of the historical real return on equity cannot be denied," he writes at one point. "It may reflect economic forces far beyond our usual concepts of capital and investment." This faith in the redemptive powers of stocks leads him to underestimate some problems. For example, his focus on patient investors ignores the dilemma of those who may have to sell holdings to meet immediate financial needs. And he perhaps underplays the possibility that history may not repeat itself.
Moreover, much of the second half of the book, an introductory guide to short-term investment, is a failure. Siegel's explanations of the futures markets and the impact of economic events on stocks are stiff and pedestrian. Anyone who wants to learn how to pick individual stocks and move money between markets in the short run should look elsewhere.
Anyone saving for retirement, however--and these days that should be almost everyone--can learn from Stocks for the Long Run. Flawed but ultimately persuasive, the book belongs on every investor's shelf.