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http://www.sfgate.com/cgi-bin/article.cgi?file=/chronicle/archive/2000/05/06/BU42977.DTL
Lower Average Returns on Stocks May Be Coming
JANE BRYANT QUINN, Washington Post Writers Group Saturday, May 6, 2000
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Hold stocks for the long term. They'll always do better than bonds or cash. In the long
run, stocks are safe.
That's dogma, in today's Church of Wealth. But allow me to disagree. As a challenger, I
want to know what you mean by "stocks," what the "long term" is and what you think is
"safe."
Historically, the market clearly favors stocks. Over 65 10-year periods since 1926, the
Standard & Poor's 500-stock average lost money only twice, and those were in decades
around the crash of 1929.
Over 60 15-year periods, stocks made money every time, according to Ibbotson Associates in
Chicago.
But you have to weigh these facts against a couple of caveats.
First, they assume that you reinvest all dividends. If you spend your dividend checks, as
some investors do, you wouldn't have come out so well.
Also, the performance data isn't adjusted for inflation. So they overstate the purchasing
power your investments yield.
After inflation, stock investors lost money in seven of the 65 10- year periods studied.
That's 11 percent of the time. There were even two 15-year periods in which investors lost
money.
There's also a higher chance of mediocre returns than most people realize. In 20 of those
15-year periods, stocks returned 5 percent or less, after adjusting for inflation. So
long-term investors had poor returns 33 percent of the time.
All of the losing periods ended in the mid-1970s to early 1980s. Since then, life has been
grand.
So here's another little fact to tuck away. Historically, super years for stocks have
followed years when the market was excessively undervalued. It was undervalued in the
1970s; in 1984, prices began a huge bull run.
Conversely (and this is the bad news), punk years for stocks follow years when prices have
been extremely high. They appear high now. That suggests lower average returns in the
years immediately ahead -- although one never knows.
This brings me back to the question of whether stocks are safe enough if held for the long
term.
First, what do you mean by "stocks?" Yes, the market usually does well over 15-year
holding periods. But that measures the S&P index of 500 leading stocks. You get different
results when you own a small collection of individual stocks. Maybe your stocks will do
better, maybe they won't.
Although markets always recover from slumps, individual stocks may not. Zenith was the
electronics superstar of its day, and Pan Am a blue chip. Yet both wound up in bankruptcy.
You cannot automatically buy and hold individual stocks. You have to review them all the
time. Are they still growing? Are their profit margins under pressure? Has unexpected
competition shown up? If you don't know, you risk holding a stock that's destined for
underperformance or even the trash bin.
You can buy and hold an index mutual fund that invests in the market as a whole. But
individual stocks have to be sold from time to time, and it's not easy to pick the right
time.
This brings me to the next question, what do you mean by "long term?" Will you keep on
investing in stocks or stock funds -- inside or outside a 401(k) -- if the market does
badly for a couple of years? Or will you move to the sidelines and wait?
If you sell when prices drop far enough to scare you, then buy when they've risen enough
for you to be reassured, it's pointless to talk about the market's successful long-term
record. You're not going to get it because you didn't stick long-term.
Investors in well-diversified mutual funds are better off in the market than out, says
Clay Singleton, Ibbotson's vice president for asset allocation. Stock market gains come in
sudden clumps -- a big month or two, followed by flat or down months. You cannot guess
those big months in advance.
Now the final question -- what do you mean by "safe?"
The longer you hold well-diversified stocks, the smaller the risk that your portfolio will
lose money.
If you hit one of those rare runs of bad luck, however, your loss could be large. In this
sense, stocks are risky over the long run, as well as over the short run.
That's why cautious investors keep a portion of their money in bond funds and cash,
especially as they approach retirement. They don't want to bet their standard of living on
always getting stock prices right.
©2000 San Francisco Chronicle
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