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In the book 'Stocks for the Long Run' , finance professor and PhD graduate Jeremy Siegel describes his research on the performance of long-term investments. He studied the returns of various asset classes and found that the stock market is the best option for long-term investors. In this video, we will learn about the five main lessons from the book 'Stocks for the Long Run' by Jeremy Siegel.
Lesson One: What is the best asset class for the long term? This chart is extremely important for investors. It shows the total real returns of the stock market compared to other asset classes after inflation from 1802 to 2012 . $1 invested in the stock market can grow to a total of more than $700,000 over time.
The second best performing asset was bonds, which yielded a return of almost $2,000 , which is very low compared to the $7,00,000 that stocks yielded. Even the stock market crash of 1929 , although it scared investors at the time , appears to have only a small change in the overall stock return index .
Bear markets, which scare investors, look very small in the face of rising stock returns. Neither bonds, commodities, nor the dollar demonstrate the same long-term real returns as stocks . However, in the short term, stock returns are very volatile . These are influenced by incomes, interest rates, risk, uncertainty, and psychological factors such as optimism, pessimism, fear, and greed .
But these short-term changes, which worry investors and the financial press the most, are not significant in the face of long-term growth in stock returns. This proves that the stock market is the best asset class in the long run . Of course, we can't wait 200 years for $ 1 to become $7,00,000 , but we can continue investing for 20 to 30 years and get excellent returns.
Second lesson: Stocks are less risky than bonds . In finance and economics , there is a common perception that bonds are safer investments than stocks . If you look at it from a volatility ratio perspective, stocks fluctuate more than bonds without any guarantee of returns. In this chart, you can see the highest and lowest real returns on stocks, bonds, and bills over various holding periods from 1802 to 2012 .
Stocks are definitely riskier than bonds or Treasury bills over a 1 and 2 year time frame . However, we can observe that the risk in stocks decreases as the holding period increases. If we look at a 20-year holding period, stocks never fell below inflation, but the returns on bonds and bills fell below the inflation rate by up to 3% per year at one point .
And for a 20-year holding period, the highest annual return of stocks was 12.6%. At the same time, bond yields were 8.8% . In this table, we can see what percentage of returns stocks have had over bonds or bills over different holding periods. As the holding period increases, the likelihood of stocks delivering better returns than fixed income assets increases significantly.
Over a 30- year time frame, stocks outperform fixed income almost 100% of the time. So based on the data , we can conclude that stocks are safer and provide better performance than bonds for long-term investors . The third is investing in ETFs . An index fund or ETF is a basket of stocks that aims to mimic the overall performance of a financial market or sector.
Investing in ETFs eliminates the risk associated with individual stocks. For example, if you invest in the S&P 500, you will own shares of the 500 largest companies listed on the American stock market . The biggest advantage of ETFs is that you do n't have to spend hours studying a company, yet you can still get excellent returns over the long term with less risk than picking stocks.
Since the past performance of actively managed equity funds has not been promising, ETFs are a better option than opting for them. The fees charged by many funds do not provide better returns for investors and can become a major obstacle to wealth growth. Most index funds have low fees . Moreover, it is very difficult to find a good money manager.
Because luck also plays a role in successful investment results . If you are a good stock picker like Warren Buffett, you can get better returns than investing in the S&P 500 . However, being a good stock picker is not an easy task. Warren Buffett also said, "For most people, the best thing to do is to own an S&P 500 index fund ." The fourth lesson is the importance of investing in global markets.
The superior long-term returns of stocks are not limited to America. Investors in other countries have also received returns that are close to or higher than those in the United States. In this image, we can see the annual returns from stocks, bonds, and bills in various countries between 1900 and 2012 .
Of all of them , stocks were the best choice. The reason for investing internationally is to diversify your portfolio and reduce risk . Foreign investment provides diversification, just like investing in different sectors of the domestic economy. It is a poor investment strategy to rely solely on one stock or one sector of the economy.
Similarly, buying only stocks in your home country is not a good strategy. Imagine that your country is facing an economic problem . If you invest in another country , you may be protected. With globalization, many companies are deriving their profits from different countries . This is also a good thing that brings diversification.
The fifth is to buy and hold stocks. From this book we can learn that the best investment strategy is to buy and hold stocks . If you invest for a long period of at least 20 years , you will definitely succeed. Investors like Warren Buffett use a 'buy and hold' strategy. He holds his stocks for the long term .
As he says , "Our favorite holding period is forever." Buffett says, "If you're not comfortable owning a stock for ten years, you shouldn't own it for ten minutes ." Unless there are major changes in the company's performance, holding for a long period of time will prevent investors from making impulsive decisions .
Investors may lose money by selling stocks when they are low or buying them when they are high due to excessive fear or greed . Let's look at an example. If you invest $1,000 a month for 30 years , the stock market's historical return after inflation is 6.6%, which will give you more than $1 million.
Buying stocks or ETFs for the long term is a successful strategy to grow your wealth over time. In 'The Little Book of Common Sense Investing' , John Bogle showed investors that it is best to invest in index funds for the long term. You can see the top five lessons from this book by clicking on the card on the screen .
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