Looking at Stocks for the Long Run

by: John Lounsbury

Jeremy Siegel is a professor at the University of Pennsylvania who wrote one of the most popular investment books of all time: "Stocks for the Long Run". The theme centers on the outperformance of stocks over many other asset classes over much of the 20th century.

The 5-Min. Forecast has a graph with a clever title:

Prof. Siegel is not an uber bull, however. He called the Nasdaq top in real time in March of 2000. He called for stocks to risk a break lower March 1, 2008. Yes, he was premature in looking for the bottom much before March, 2009. But he did give advice that would have avoided much of the declines in 2000-02 and 2008.

So the implied gibe at Prof. Siegel by the folks at the 5-Min. Forecast is a little over the top. But it is not out of order to point out that buy and hold for the long run in stocks can be a damaging and certainly was in the decade highlighted by the graph.

If someone spent the ten years 50% in stocks and 50% in T-bills, the total return would have been negative, even though the compounded return in T-bills was 2.5% annually.

What happens when we look at longer time periods? The following three charts look at the 30-, 20- and 10-year comparisons of some of the assets classes covered by the 5-Min. Forecast, using data from Stern.NYU.edu and nma.org:

Click on charts for large images.

The data is based annual returns for the years 1979 to 2009.

The last decade has been atypical compared to the last 20 and last 30 years.

Disclosure: Several long positions in S&P 500 stocks; both short and long positions in Nasdaq stocks; Treasury maturities under 3 years; TIPS; and gold linked CDs