The case for investing in common stocks remains compelling. Them's fightin' words at a time when the Dow Jones Industrial Average is back to 1964 levels, and down 20 per cent from its peak. Nevertheless, over holding periods of five and ten years, common stocks have generally returned better profits than money in the bank. Over 15 years and up, stocks are almost always the best choice.
Testimony to this fact comes from a new book with the electrifying title, "A Half Century of Returns on Stocks and Bonds," by professors Lawrence Fisher and James H. Lorie ($25, University of Chicago Press). Casual readers might better slog through Proust's "Remembrance of Things Past." But for investment fanatics, 170 pages of tables are pure joy.
When you review what's happened to your own stocks or mutual funds over the past few years, you probably think only of price. But unless you invested exclusively in companies that scorned dividends, you also should have gotten a reasonable dividend income. Investors often forget to count that segment of their investment returns.
Fisher and Lorie don't forget it. Their tables look at stock performance with dividends reinvested and without; before and after taxes; before inflation and after; and even make an adjustment for brokerage commissions.
From their data, I've extracted longterm average annual stock performance for various holding periods, beginning with 1930. The 25-year holding periods, for example, start with 1930-55, 1931-56, 1932-57 and so on, all the way down to 1951-76. The results shown below assume buying and holding an equal number of shares of all the stocks on the New York Stock Exchange, with dividends reinvested. These are the average annual investment yields you would have received:
For 25-year holding periods: The most recent showed an average annual return of 10.9 per cent a year. Overall annual returns ranged from 10 to 17 per cent.
For 20-year holding periods: The most recent was 9.6 per cent, close to the low rate for that entire time. The high was 19.6 per cent.
For 15-year holding periods: With only one exception, annual returns ranged from 8 to 22 per cent, mostly clustered in the 11-to-16 per cent area. The most recent was 8.4 per cent.
For 10-year holding periods: The most recent showed an average annual return of 8.4 per cent, but the two before that were poor. Prior to the period ending in 1973, returns ranged from 8 to 19 per cent a year, with most in the 11-to-15 per cent area.
Five-year holding periods are more erratic. Returns in the most recent periods ranged from plus to minus six per cent a year. In the Depression years, they were as high as 35.6 per cent and as low as -9 (minus nine) per cent. For periods starting in 1940 to 1966, the annual range was 10 to 17 per cent.
Long-term stock yields, in other words, have been excellent.
There are a couple of flies in this ointment. Over recent periods, you'd have done much better with your money in the bank.
Also, there was a time when both short and long-term results were pretty bad - namely, the holding periods starting in 1925-29, when the Fisher Lorie tables begin. Even after 20 years, some average annual returns were as low as 3 per cent. On the other hand, if investors had bought long-term bonds during that period and held for 10 or 15 years, they'd have gotten 6 and 7 per cent after inflation.
If our current investment climate resembles 1925-29, rather than the 47 years since, the message of the Fisher Lorie date is: buy bonds, not stocks, at least for the time being. Inflation adjusted bond yields are now attractive for the first time since the Depression. But for periods of 10 years or more, stocks will have the edge.