Over the Long Term, Nothing Beats Stocks

Over the Long Term, Nothing Beats Stocks

Mark Vakkur, MD

Despite all my work attempting to time the market, the case for long-term ownership of stocks is staggering. There has never been a 30-year period in which United States stocks, after inflation, lost money. However, every other major asset class has had at least one such losing period, and the magnitude of returns for stocks were several times higher than for those other classes. (source: Siegel)

I created an inflation-adjusted (i.e., real) total return stock index, which reflects both the impact of reinvested dividends and inflation (as measured by the Consumer Price Index) on returns. From 1871 to the present, we examined every rolling 30-year period and found that the best times to buy stocks for the long term were during periods of short-term market weakness.

Figure 2: Stock Market Long-Term After-Inflation Returns

Stock Market Average Annual Returns After Inflation, 1871-February, 2001:
	Year	5 Years	10 Years	20 Years	30 Years
Highest:	150.5%	33.2%	19.9%	13.7%	11.1%
75th percentile:	21.6%	12.2%	10.7%	8.7%	7.9%
Median:	8.6%	7.3%	7.1%	6.8%	6.3%
25th percentile:	-3.7%	2.5%	3.7%	3.9%	5.1%
Lowest:	-57.7%	-13.0%	-4.6%	-0.2%	1.9%
Average:	9.0%	7.5%	7.1%	6.6%	6.5%
% Up:	68.2%	83.6%	88.9%	99.9%	100.0%
Source: Robert J. Shiller, Barrons, Bureau of Labor Statistics

The historical record is compelling: investors have been richly rewarded for holding stocks over the long term. Even after inflation, all 30-year periods were positive; in fact, 99.9% of all 20-year and 88.9% of all ten year periods were positive.

Although it is tempting to "bail out" during periods of volatility, the long-term high real returns of stocks should encourage investors to "stay the course." We contend that the long-term real average return of 6.5% significantly understates the potential returns available to investors in what we continue to believe is a superbull environment with low inflation, low interest rates, and an anti-recessionary Fed monetary policy.

Some fear a much deeper bear market decline. Even if the S&P 500's March 2000 high was a major market top -- and we continue to believe that it was not -- this would be no reason to avoid stocks. The subsequent 30-year returns following the three greatest market peaks of the 20^th century were not, on balance, worse than the longer-term average. The following tables show such total and average annual returns, respectively.

Figure 3: Stock Market Gains After Market Peaks

Prior Peak:		Total, After-Inflation Return Over Next:
		Year	5 Years	10 Years	20 Years	30 Years
June	1901	-5.5%	18.1%	53.7%	-4.0%	297.0%
September	1929	-27.6%	-50.3%	-12.3%	9.9%	439.9%
December	1968	-16.8%	-19.7%	-30.8%	73.0%	610.6%
Prior Peak:		Total, After-Inflation Average Annual Return Over Next:
		5 Years	10 Years	20 Years	30 Years
June	1901	3.4%	4.4%	-0.2%	4.7%
September	1929	-13.0%	-1.3%	0.5%	5.8%
December	1968	-4.3%	-3.6%	2.8%	6.8%
Long-Term Average:		7.5%	7.1%	6.6%	6.5%

Source: Robert J. Shiller, Barrons, Bureau of Labor Statistics

• Following the 1901 peak, the next 30 years were extraordinary and aberrant, since they included World War I, the Crash of '29, and the beginning of the Great Depression. Nevertheless, a dollar invested even during this abysmal period would have almost quadrupled (+297%) by the end of the holding period.
• Following the 1929 peak, an investor would have earned 5.8% per year after inflation over the subsequent 30 years, despite the Crash of '29, the Great Depression, and World War II! These gains swamped what an investor would have earned in bonds, cash, real estate, or gold over the same time period.
• Following the 1968 peak, you would have earned an above-average 6.8% after inflation over the next 30 years.

However, these returns represent the very worst case: investing a lump sum at the exact market peak. Even assuming that the gloomiest predictions are correct, the above returns must be updated for the current S&P 500 market level, about 25% off its peak. If one had invested when the market was as far below each of the three major stock market peaks of the last century, your subsequent total after-inflation return would have been even higher:

Figure 4: Stock Market Gains After 25% Decline From Market Peaks

If 25.1% Below Prior Peak of:		Total, After-Inflation Return Over Next:
		Year	5 Years	10 Years	20 Years	30 Years
June	1901	26.4%	57.9%	105.5%	28.3%	430.7%
September	1929	-3.3%	-33.5%	17.3%	46.9%	621.7%
December	1968	11.2%	7.4%	-7.5%	131.3%	849.9%
Average of 3 Post-Market Peak Periods:		11.4%	10.6%	38.4%	68.8%	634.1%
Average, Annualized:		11.4%	2.0%	3.3%	2.7%	6.9%

Source: Robert J. Shiller, Barrons, Bureau of Labor Statistics

The average post-peak period had positive after-inflation returns in all time frames, even as short as one year, at 11.4%. Over the longest time frame, the after-inflation return from stocks was superior to every other asset class.

Shorter-term analysis seems also generally reassuring. Only one of the three market tops was followed by a five-year decline -- the Great Depression, at -33.5%. The other two five-year total returns were +57.9% and 7.4%. Similarly, only one of the three highest peaks was followed by a 10-year decline -- December 1968, at -7.5%. The other two 10-year returns were 105.5% and 17.3%.

Most investors, who make periodic investments and withdrawals over the decades, would have done even better on a dollar-time-weighted basis. Fluctuations and stock market volatility create tremendous opportunity for the long-term investor who does not panic.

Bottom line: Even if you believe that the market peaked in March 2000, and if the very worst times to invest in the stock market over the past century are repeated, stocks should multiply your wealth between 5.3 to 9.5 times over the next three decades, after inflation.