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The Investor

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:
Economics, Business, Social Security