The after-inflation total return over , , and year holding periods after the eight major stock market peaks of the last century is shown in Figure Even from major stock market peaks, the wealth accumulated in stocks is more than four times that in bonds and more than five times that in Treasury bills if the holding period is 30 years.
If the holding period is 20 years, stock accumulations beat those in bonds by about twoto-one. Even 10 years after market peaks, stocks still have an advantage over fixed-income assets. Unless investors believe there is a high probability that they will need to liquidate their savings over the next 5 to 10 years to maintain their living standard, history has shown that there is no compelling reason for long-term investors to abandon stocks no matter how high the market may seem.
Of course, if investors can identify peaks and troughs in the market, they can outperform the buy-and-hold strategy that is advocated in this book. But, needless to say, few investors can do this. And even if an investor sells stocks at the peak, this does not guarantee superior returns. As difficult as it is to sell when stock prices are high and everyone is optimistic, it is more difficult to buy at market bottoms when pessimism is widespread and few have the confidence to venture back into stocks.
But in many did not get back into the market until it had already passed its previous highs. And many of the bears of the most recent decline are still out of the market, despite the fact that most market averages have hit all-time highs. In the long run, getting out of the market at the peak does not guarantee that you will beat the buy-and-hold investor.
Standard deviation is the measure of risk used in portfolio theory and asset allocation models. Although the standard deviation of stock returns is higher than for bond returns over short-term holding periods, once the holding period increases to between 15 and 20 years, stocks become less risky than bonds.
Over year periods, the standard deviation of a portfolio of equities falls to less than three-fourths that of bonds or bills. The standard deviation of average stock returns falls nearly twice as fast as for fixedincome assets as the holding period increases.
The dashed bars in Figure show the decline in risk predicted under the random walk assumption. But the historical data show that the random walk hypothesis cannot be maintained for equities. This is because the actual risk of stocks declines far faster than the predicted rate, indicated by the dashed bars. This occurs because of the mean reversion of equity returns that I described in Chapter 1.
This is a manifestation of mean aversion of bond returns. Mean aversion of bond returns is especially characteristic of hyperinflations, such as those that impacted Japanese and German bonds, but it is also present in the more moderate inflations that have hit the United States and the United Kingdom. Once inflation begins to accelerate, the inflationary process becomes cumulative and bondholders have virtually no chance of making up losses to their purchasing power.
In contrast, stockholders who hold claims on real assets rarely suffer a permanent loss due to inflation. This will be true if bond and stock returns are negatively correlated, which means that bond yields and stock prices move in opposite directions. The diversifying strength of an asset is measured by the correlation coefficient.
The lower the correlation coefficient, the better the asset serves as a portfolio diversifier. Assets with negative correlations are particularly good diversifiers. As the correlation coefficient between the asset and portfolio returns increases, the diversifying quality of the asset declines. The correlation coefficient between annual stock and bond returns for six subperiods between and is shown in Figure From through the correlation was only slightly positive, indicating that bonds were fairly good diversifiers for stocks.
This means that the diversifying quality of bonds diminished markedly from to There are good reasons why the correlation became more positive during this period.
Under the gold-based monetary standard of the s and early s, bad economic times were associated with falling commodity prices; when the real economy was sinking, stocks declined and the real value of government bonds rose.
This inflationary policy accompanies a weak real economy, such as occurred during the s. The negative short-term effects of inflation on equity returns are detailed in Chapter But this has changed in recent years.
Since there has been a dramatic reversal in the short-term correlation between stock and bond prices, as shown in Figure Over the past decade stock prices have been negatively correlated with government bond prices. From through the world markets were roiled by economic and currency upheavals in Asia, the deflationary economy in Japan, and then the events of September As a result international investors fled to the U.
Long-term U. Treasury issues when equities experienced sudden declines persisted, despite the Asian recovery and the improving Japanese economy. As central banks have held firm against inflation, government bonds can be an island of stability when there is financial stress. But it is an open question whether bonds will be good long-term diversifiers, especially if the specter of inflation looms once again. Nevertheless, the premium now enjoyed by Treasury issues generated by investors seeking short-term safe havens means that the return on government bonds will be low and they will become less desirable to longterm investors.
Figure , based on the year history of stock and bond returns, displays the risks and returns that result from varying the proportion of stocks and bonds in a portfolio over various holding periods ranging from 1 to 30 years. The square at the bottom of each curve represents the risk and return of an all-bond portfolio, while the cross at the top of the curve represents the risk and return of an all-stock portfolio. The circle falling somewhere on the curve indicates the minimum risk achievable by combining stocks and bonds.
The curve that connects these points represents the risk and return of all blends of portfolios from percent bonds to percent stocks. This curve, called the efficient frontier, is the heart of modern portfolio analysis and is the foundation of asset allocation models. Investors can achieve any combination of risk and return along the curve by changing the proportion of stocks and bonds. Moving up the 5 Short-term Treasury securities such as bills have often enjoyed safe-haven status.
Rising bond prices in a tumultuous equity market also occurred during the October 19, , stock market crash, but much of the rise then was predicated on the correct belief that the Fed would lower short-term rates.
As stocks are added to the all-bond portfolio, expected returns increase and risk decreases, a very desirable combination for investors. But after the minimum risk point is reached, increasing stocks will increase the return of the portfolio but only with extra risk.
The slope of any point on the efficient frontier indicates the risk-return trade-off for that allocation. By finding the points on the longerterm efficient frontiers that have a slope equal to the slope on the one-year frontier, one can determine the allocations that represent the same risk-return trade-offs for all holding periods.
The answer can be seen in Table , which is based on standard portfolio models incorporating both the risk tolerance and the holding period of the investor. The recommended equity allocation increases dramatically as the holding period lengthens. Based on the years of historical returns on stocks and bonds, ultraconservative investors should hold nearly threequarters of their portfolio in stocks over year holding periods. This allocation is justified since stocks are safer than bonds in terms of purchasing power over long periods of time.
The historical data suggest that even conservative investors should hold nearly 90 percent of their portfolio in stocks for these long horizons, while the analysis indicates moderate and aggressive investors should have over percent in equity. Borrowing or leveraging an all-stock portfolio can achieve this allocation, although if such borrowing is not desired, investors with these preferences would do quite well to hold percent of their long-term portfolio in stocks.
Given these striking results, it might seem puzzling that the holding period has almost never been considered in portfolio theory.
This is 7 The one-year proportions except minimum risk point are arbitrary and are used as benchmarks for other holding periods. Choosing different proportions as benchmarks does not qualitatively change the analysis.
As noted earlier, under a random walk, the relative risk of various securities does not change for different holding periods, so portfolio allocations do not depend on how long one holds the asset. The holding period becomes a crucial issue in portfolio theory when the data reveal the mean reversion of stock returns.
But in January , the U. Treasury issued the first government-guaranteed inflation-indexed bond. The coupons and principal repayment of this inflation-protected bond are automatically increased when the price level rises, so bondholders suffer no loss of purchasing power when they receive the coupons or final principal. Since any and all inflation is compensated, the interest rate on this bond is a real, or inflationadjusted, interest rate. However, these yields have declined markedly since , and at the end of , their real yields fell to about 2 percent, less than onethird the historical return on equity.
Nevertheless, these bonds may be an attractive alternative for investors who do not want to assume the short-term risks of stocks but fear loss of purchasing power in bonds. In 20 percent of all year periods from , stocks have fallen short of a 2.
For most long-term investors, inflation-indexed bonds should dominate nominal bonds in a portfolio. Viceira and John Y. Paul Samuelson has shown that mean reversion will increase equity holdings if investors have a risk aversion coefficient greater than unity, which most researchers find is the case.
Brainard, W. Nordhaus, and H. Watts, eds. Bodie, Merton, and Samuelson have shown that equity holdings can vary with age because stock returns can be correlated with labor income. But in the long run, history has shown that stocks are actually less risky investments than bonds.
Historical evidence indicates that we can be more certain of the purchasing power of a diversified portfolio of common stocks 30 years in the future than the principal on a year U. But today the Dow does not go unchallenged as an indicator of market prices. The rise of the Nasdaq did not go unnoticed at Dow Jones. In , for the first time in over years, Dow Jones ventured off the Big Board, as the New York exchange is called, and selected two Nasdaq stocks—Microsoft and Intel—to join its venerable list.
On February 16, , he began publishing a daily average of 12 stocks 10 railroads and 2 industrials that represented active and highly capitalized stocks. Four years later, Dow published a daily average based on 20 stocks—18 railroads and 2 industrials. As industrial and manufacturing firms succeeded railroads in importance, the Dow Jones Industrial Average was created on May 26, , from the 12 stocks shown in Table The old index created in was reconstituted and renamed the Rail Average on October 26, In , the Industrial Average was increased to 20 stocks, and in the number was expanded to The Rail Average, whose name was changed in to the Transportation Average, is composed of 20 stocks, as it has been for over a century.
The early Dow stocks were centered on commodities: cotton, sugar, tobacco, lead, leather, rubber, and so on. Six of the 12 companies have survived in much the same form, but only one—General Electric, which in the summer of boasted the second-highest market value on U.
The only exception was U. Leather Corp. But in , the president, Lowell Birrell, who later fled to Brazil to escape U. Shares in U. Leather, which in was the seventhlargest corporation in the United States, became worthless. Computation of the Dow Index The original Dow Jones averages were simply the sum of the prices of the component shares divided by the number of stocks in the index. However, this divisor had to be adjusted over time to prevent jumps in the index when there were changes in the companies that constituted the average and stock splits.
In December , the divisor was about 0. Because of stock splits, the divisor generally moves downward over time, but the divisor could increase if a higher-priced stock is substituted for a lower-priced one in the average. As a result, proportional movements of high-priced stocks in the Dow averages have a much greater impact than movements of lower-priced stocks, regardless of the size of the company. A price-weighted index has the property that when a component stock splits, the split stock has a reduced impact on the average, and all the other stocks a slightly increased impact.
Out of the 10 largest U. But not all the Dow stocks are large. Two Dow stocks are not even in the top Alcoa and General Motors. And the smallest, General Motors, is ranked below and has about 4 percent of the market value of Exxon Mobil, which is the largest component.
Long-Term Trends in the Dow Jones Figure plots the monthly high and low of the Dow Jones Industrial Average from its inception in , corrected for changes in the cost of living. The inset shows the Dow Industrial Average uncorrected for inflation. A trend line and a channel are created by statistically fitting the Dow on a time trend. The upper and lower bounds are 1 standard deviation, or 50 percent, above and below the trend.
The slope of the trend line, 1. The Dow Jones average, like most other popular averages, does not include dividends, so the change in the index greatly understates the total return on the Dow stocks. Since the average dividend yield on stocks was about 4. This led to rising stocks having greater weight in the average, something akin to value-weighted stock indexes today.
When the Dow broke out of the channel to the upside, as it did in and again in the mids, stocks subsequently suffered poor short-term returns.
Likewise, when stocks penetrated the channel on the downside, they subsequently experienced superior short-term returns. Long-standing trends have been broken in the past.
Uncorrected for inflation, the Dow Industrials broke and stayed above the trend line in the mids, as shown in the inset of Figure This is because inflation, caused by the shift to a paper money standard, 42 PART 1 The Verdict of History propelled nominal stock prices justifiably above their previous, noninflationary trend.
Those who used trend-line analysis and who failed to analyze stock prices in real, instead of nominal, terms would have sold in and never reentered the market. Stock indexes record only capital appreciation, and they therefore understate total returns, which must include dividends.
But firms have been paying an ever-lower fraction of their earnings as dividends. More of the return is being pushed into capital gains through stock buybacks and reinvestment of earnings. Since the average dividend yield on stocks has fallen 2.
By that measure the Dow level at the end of , although at a peak, was within 1 standard deviation of the mean. In the Standard Statistics Co. This technique is now recognized as giving the best indication of the overall market, and it is almost universally used in establishing market benchmarks. The stocks contained exactly industrial, 25 railroad, and 50 utility firms. Before , the number of companies in each industry was restricted to these guidelines.
Nasdaq Index On February 8, , the method of trading stocks underwent a revolutionary change. Formerly, quotations for these unlisted stocks were submitted by the principal trader or by brokerage houses that carried an inventory. The Nasdaq linked the terminals of more than market makers nationwide to a centralized computer system. In contrast to the Nasdaq, stocks traded on the New York or American Stock Exchanges are assigned to a single specialist, who is charged with maintaining an orderly market in that stock.
The Nasdaq changed the way quotes were disseminated and made trading these issues far more attractive to both investors and traders. At the time that the Nasdaq was created, it was clearly more prestigious to be listed with an exchange and preferably the New York Stock Exchange than be traded on the Nasdaq.
Nasdaq stocks tended to be small or new firms that had recently gone public or did not meet the listing requirements of the larger exchanges. However, many young technology firms found the computerized Nasdaq system a natural home. The Nasdaq Index, which is a capitalization-weighted index of all stocks traded on the Nasdaq, was set at on the first day of trading in It took almost 10 years to double to and another 10 years to reach in It reached its first major milestone of 1, in July As the interest in technology stocks grew, the rise in the Nasdaq Index accelerated, and it doubled its value to 2, in just three years.
In the fall of , the technology boom sent the Nasdaq into orbit. The index increased from 2, in October to its all-time peak of 5, The increase in popularity of Nasdaq stocks resulted in a tremendous increase in volume on the exchange.
By the capitalization of the Nasdaq had already exceeded that of the Tokyo Stock Exchange. By Microsoft was the only Nasdaq stock among U. When the technology bubble burst, trading and prices on the Nasdaq sunk rapidly. The Nasdaq Index declined from over 5, in March to 1, in October before rebounding to 2, at the end of Trading also fell off from an average of over 2. Although there is a lively rivalry between the Nasdaq and the NYSE, most investors should not be concerned about what exchange a 5 There is admittedly some double counting of volume in the Nasdaq dealer system due to the fact that the dealer buys the security rather than acting as an auctioneer.
See Anne M. Anderson and Edward A. Small stocks may be better served by having a specialist provide liquidity, but the spread between the price a stock sells for and the price it can be bought for may be lower on active stocks under the Nasdaq market maker system. There is now rapid consolidation among exchanges, and cross-listing of issues is now becoming common. The importance of what exchange a stock is listed on will decline even more in the future.
The firm wanted to investigate how well people had done investing in common stock and could not find reliable historical data. Professor Lorie teamed up with colleague Lawrence Fisher to build a database of securities data that could answer that question. The largest comprehensive index of U.
The top 1, firms in market value, which are virtually identical to the Russell and published by the Russell Investment Group, comprise The Russell contains the next 2, largest companies, which adds an additional The Russell , the sum of the Russell and indexes, comprises The remaining 3, stocks constitute 2. But this is not the case. To replicate an index, the date of additions and deletions to the index must be announced in advance so that new stocks can be bought and deleted stocks can be sold.
This is particularly important for issues that enter into bankruptcy: the postbankrupt price which might be zero must be factored into the index. Steel; and two American Sugar and U. Rubber went private—both in the s. Surprisingly, only one Distilling and Cattle Feeding changed its product line from alcoholic beverages to petrochemicals, although it still manufactures ethanol , and only one U.
Leather liquidated. Here is a rundown of the original 12 stocks market capitalizations as of March : American Cotton Oil became Best Food in , Corn Products Refining in , and finally, CPC International in —a major food company with operations in 58 countries. American Sugar became Amstar in and went private in In September the company changed its name to Domino Foods, Inc.
This eventually led Value Line to abandon the geometric average in favor of the arithmetic one, which could be replicated. Industries in Peoples Energy Corp. Distilling and Cattle Feeding went through a long and complicated history. Two months after the passage of prohibition, the company changed its charter and became U. Food Products Corp. The company became Quantum Chemical Corp. Louis area. National Lead NL changed its name to NL Industries in , and it manufactures titanium dioxide and specialty chemicals.
North American became Union Electric Co. UEP in , providing electricity in Missouri and Illinois. Steel in , and it became USX-U. Steel Group X in May In January , the company changed its name back to U. Steel Corp. Rubber became Uniroyal in , and it was taken private in August In Uniroyal was purchased by the Michelin Group, which has a market value of 13 billion.
Corporate History Most of the change we think we see in life is due to truths being in and out of favor. On average the new firms constitute about 5 percent of the market value of the index.
In , at the peak of the technology bubble, 49 new firms were added to the index, the highest since Nasdaq stocks were included in In , just after the bottom of the subsequent bear market, the number of additions fell to a record-tying low of 8. Steel, chemical, auto, and oil companies once dominated our economy. Today healthcare, technology, finance, and other consumer services firms hold sway.
Increasingly, active investors are using sector analysis to allocate their portfolios. The materials sector, by far the largest in , has become the smallest today. The materials and energy sectors made up almost one-half of the market value of the index in , but today these two sectors together constitute only 12 percent of the index.
It is important to realize that when measured over long periods of time, the rising or falling market shares do not necessarily correlate with rising or falling investor returns.
That is because change in sector shares often reflects the change in the number of firms, not just the change in the value of individual firms. This is especially true in the financial sector, as commercial and investment banks, insurance companies, brokerage houses, and government-sponsored enterprises such as Fannie Mae and Freddie Mac have been added to the index since The technology share has also increased primarily because of the addition of new firms.
In , IBM was two-thirds the technology sector; in , IBM was only the third largest in a sector that contains 74 firms. Long Run willingly updated their data for this second edition.
Oil Company, which was only one-fifth the size of U. Steel, American Tobacco,. It is a book focused on long-term buy-and-hold investing. Again, I think that that approach is on the one. Valuation-Informed Indexing too is an approach rooted in a study of what the historical stock-return data tells us about how to invest successfully for the long term.
The powerful idea at the core of Stocks for the Long Run is that stock investing becomes less risky with time. The other side of the story is that Stocks for the Long Run is chock full of analytical errors. File Name: jeremy siegel stocks for the long run 5th edition pdf.
Stocks for the Long Run. Doing investment in a friendly environment is an easy job but doing investment in the crisis situation is an art. Jeremy is an expert in investing and making profits when the market is in crisis. Learn, how to understand the situation of the market and how to make better decisions? What are the things that really matter while investing money and why everyone needs a mentor while investing money?
Are countries still relevant for global investing? Will stock indexing match its past performance? Can tomorrow's stock market deliver the same returns as markets in the past?
Praise for previous editions of Stocks for the Long Run: Should command a central place on the desk of any 'amateur' investor or beginning professional.
0コメント