Free Republic
Browse · Search
Topics · Post Article

Skip to comments.

The Least of Our Worries (Social Security reformers should rest easy: the stock market makes money.)
The American Prowler ^ | 2/11/2005 | Lawrence Henry

Posted on 02/10/2005 11:00:43 PM PST by nickcarraway

I spent a good chunk of the 1990s writing mutual fund advertising, so much of it that the required caveats and footnotes still trip off the fingers: "Past performance is no guarantee of future results." "The Fund is offered only by prospectus. Please read the prospectus carefully before investing or sending money." Financial services advertising, you see, is ringed about by careful regulation. You can't cherry pick and show off only one good year. You can't make false comparisons. And so forth.

One home truth came through that long experience, and I share it here with doubters and fear-mongers who worry about investing a portion of one's Social Security funds in the "risky" stock market.

Buy $500 worth of any reputable diversified stock mutual fund once a year for 20 years, and at the end of 20 years, you'll have a lot more than $10,000. You will have more than if you had bought $500 worth of corporate bonds, more still than if you had bought $500 worth of Treasury securities.

Jeremy Siegel, a professor of economics at the University of Pennsylvania's Wharton School, published Stocks for the Long Run (Irwin Professional Publishing) in 1994. It has gone through several editions since. Siegel reconciled historic stock and bond market records and more modern indexes so as to make direct comparisons of performance in the U.S. securities markets possible all the way back to 1802.

Figure 1-1 of Stocks for the Long Run (p. 6) tells the bald story. A "total return index" (meaning all returns reinvested, not spent) for U.S. stocks, starting at $1, ends in the early 1990s at $3.05 million. A dollar invested in corporate bonds grows to $6,620; a T-bill investment to $2,934. A dollar in gold would have increased to $13.40, while the Consumer Price Index rose to $11.80. Factor in that CPI rise and the stocks are worth $260,000, post-inflation. Still.

"…THE TOTAL RETURN ON EQUITIES DOMINATES all other assets," Siegel writes. "Bear markets, which so frighten investors, pale in the context of the upward thrust of stock returns."

In the mutual fund business, we had lots of ways of pointing this out, and of educating investors about market growth and volatility. We would counsel, for example, investing a level amount every month or every quarter. "Buy more (mutual fund) shares when the market is down, and fewer when the market is high," we would write. We would point out that it is nearly impossible to find even a five-year period when stocks lose money. (Professor Siegel calls the Crash of 1929 "a blip," which the National Association of Securities Dealers' regs wouldn't have allowed us to say.) For one client, we regularly wrote that it was "time, not timing" that makes money.

There are ways, too, to damp out the shorter-term fluctuations of a stock market portfolio. You can add some bonds to it, for example. In recent years, fund companies have started offering variously called "life cycle" or "life style" funds. You invest in a blended fund of stock and bond portfolios. Throughout your life, as your investment horizon shortens, that portfolio automatically shifts to the more conservative (bond-dominated) asset allocation.

That appears to be the kind of plan that will be on the table for personal accounts under the proposed Social Security reform. And that, along with an ultimate distribution strategy, is a discussion for another time.

For right now, I suspect, most Americans will see right through the scare-mongering about the "risky" stock market. The tale of the tape is clear. The American economy is a heck of a good deal, and has been for a long, long time.

It's a lot better deal than government, come to think of it. Figure 1-3 of Stocks for the Long Run (p. 13) shows the total real return, that is, minus inflation, of various assets. As mentioned before, a dollar's worth of stock in 1802 translates to $260,000 in the early 1990s. That 1802 dollar? It's worth 9 cents.

TOPICS: Business/Economy; Constitution/Conservatism; Culture/Society; Editorial; Miscellaneous; News/Current Events
KEYWORDS: bonds; books; business; economica; equities; fixedincome; gold; index; investment; mutualfunds; nasd; securities; siegel; socialsecurity; wharton

1 posted on 02/10/2005 11:00:43 PM PST by nickcarraway
[ Post Reply | Private Reply | View Replies]

To: nickcarraway

Stocks for the Long Run is a great book. Not an easy read, but chock full of solid, helpful data and information.

2 posted on 02/10/2005 11:14:21 PM PST by Choose Ye This Day (This is a president who wants to leave his mark on more than a cocktail dress. --Steyn)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Choose Ye This Day

That chart from 1802-1997 alone is worth the price of the book.

3 posted on 02/10/2005 11:16:07 PM PST by nickcarraway
[ Post Reply | Private Reply | To 2 | View Replies]

To: nickcarraway
What you really need to look at is stock market appreciation in real terms, taking into account inflation. "Machinehead" posted this the day before yesterday on another forum:

Old timers may remember this as the 39th anniversary of the day (9 Feb 1966) when the Dow topped out at 995.15, setting a high in real terms that endured into the 1990s. (If you use Kali house prices as the inflation index, it's probably NEVER been exceeded).

4 posted on 02/10/2005 11:22:47 PM PST by steve86
[ Post Reply | Private Reply | To 1 | View Replies]

To: BearWash

Isn't the point of the CPI to take account of real terms?

5 posted on 02/11/2005 12:26:54 AM PST by Mason
[ Post Reply | Private Reply | To 4 | View Replies]

To: nickcarraway
Thanx for posting this nick ... I haven't completely thought it through yet, but I have an idea regarding Social Security that I'd like some feedback on from folks here in FR.

Oh oh .... after 4AM ... off to work.

6 posted on 02/11/2005 1:09:54 AM PST by knarf (A place where anyone can learn anything ... especially that which promotes clear thinking.)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Mason

Where they factor in that CPI rise, yes. Makes quite a difference, doesn't it?

7 posted on 02/11/2005 1:17:38 AM PST by steve86
[ Post Reply | Private Reply | To 5 | View Replies]

To: nickcarraway
As a GenXer I think I would much prefer a program that I can opt out or join up. Something like a 401k plan. I have a feeling that will not be the case. That we will see a hybrid and still be FORCED to pay into the program, whether we choose the private accounts or the social accounts. Especially with more Securities Firms offering 401k type plans for the small business owner and other various ways to save. What exactly is the point of a Federal Program nowadays. I can understand back in the 30s when the stock market, your local bank or your bed mattress were the only options. But that just not the case today. There is no excuse for certain age groups to retire with nothing today. Except for their own personal failings.
8 posted on 02/11/2005 2:35:32 AM PST by neb52
[ Post Reply | Private Reply | To 1 | View Replies]

To: nickcarraway
The Fed is panicked by the debt bubbles that have been created by their easy money policies. They have decided the only way out is to debase the currency.

Those on fixed incomes beware. The Weimar Republic is about to be reborn.


9 posted on 02/11/2005 3:00:43 AM PST by tm22721
[ Post Reply | Private Reply | To 1 | View Replies]

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794 is powered by software copyright 2000-2008 John Robinson