Module 1: Investment Basics | Blog 1-4: Long Run Returns and Risks by David Krause

Not every year will generate 30+% returns like we saw in 2013; however, they are good long-term investments. In Lesson 1-4 and in previous blog entries, a strong case was made for investing in common stocks – which have been the best-performing asset class during the past century.


The Wall Street bull

Stocks for the Long Run is a book on investing by Jeremy Siegel that is worth reading. Its first edition was released in 1994 and the latest version was released in 2007. The book strongly supports the long-held conventional wisdom that most individuals should be invested in the stock market. It is also considered to be one of the best written and researched investment books of all time.

Dr. Siegel is a finance professor at the Wharton School of Business at the University of Pennsylvania – and he has long been considered one of the biggest “bulls” on the stock market. He has written that a 7% per year [average] real return on common stocks is what has been earned over the past two centuries in the United States, according to his research. Siegel says that he does not see any persuasive reasons why it should be any different in the future.

world mapMcKinsey & Co., the highly regarded management consulting firm, which publishes various long-term think pieces, recently reported that much of the U.S. stock market’s performance over the past half-century “is clearly linked to the performance of the real economy.” Their prediction is that if the U.S. can average real GDP growth of 2-3% each year and inflation doesn’t run rampant, the average investor can expect between 5% and 7% real stock returns over the next few decades. In fact, the McKinsey folks say they can’t foresee stock returns falling below an average of 5%, short of a major disaster — or “catastrophic” changes in the global economy.

While I don’t have a crystal ball that can predict the future, I believe it is wise to tune out the short-term noise and stay the course with regard to investing in common stocks. Investors need to earn strong positive real rates of return – and common stocks offer the best opportunity.

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