PHILADELPHIA -- When the Dow Jones industrial average was in free fall on Wednesday, I was at the University of Pennsylvania’s Wharton School listening to finance professor Jeremy Siegel talk about what went wrong in the last financial crisis.
Behind Siegel, on a split screen, were his lecture notes and real-time stock market data. Red numbers dominated the board for all the major indexes. And during the class, which I attended as part of a fellowship, the Dow plunged 500 points.
By day’s end, it had fallen nearly 832 points, or 3.15 percent. The Standard & Poor’s 500-stock index and Nasdaq also saw significant drops, 3.29 percent and 4.08 percent, respectively.
"What do you think is going on?" I asked Siegel during class.
In his answer, he diverted our attention to historical trends in the stock market. He kept to his lecture points, unfazed by the market's dramatic dip.
It was surreal listening to Siegel -- a highly respected scholar on capital markets -- deliver rapid-fire economic data like a restaurant server might speed through the nightly dinner specials.
My head was spinning as my heart was racing, knowing my retirement portfolios were experiencing thousands of dollars of losses -- on paper at least. But Siegel was telling us to have faith in stocks based on how they have performed historically. Of course, past performance is no guarantee of future results.
Yes, there will be more market corrections, recessions and economic downturns. And people will lose money, especially if they act emotionally rather than rationally, Siegel said.
Yet, he wasn't worried.
"I don't think we are at the point where we have to panic," he added.
Look at the numbers, he urged. The market's historical patterns of ups and downs provide perspective that should calm nerves.
In his book "Stocks for the Long Run," now in its fifth edition, Siegel is not so much a bull-market enthusiast as a realist. To him, it's all about facts, and not feelings.
From January 1802 to June 2018, the compound annual real return for a broadly diversified portfolio of stocks averaged 6.6 percent per year after inflation, according to Siegel. For long-term government bonds, the average real return was 3.5 percent. As for gold, which gets a resurgence of investor interest whenever the stock market dives, the real return averaged 0.5 percent, just ahead of inflation.
"Stocks are indeed the best long-term investment for those who learn to weather their short-term volatility," he writes in his book. "Investing over time in stocks has been a winning strategy whether one starts such an investment plan at the market top or not."
Where do investors go wrong? Here's where, according to Siegel:
-- They take far too many risks.
-- They pay too much in transaction costs. Do you know what fees you’re being charged for your investments?
-- They get too emotional. Siegel writes: “We find ourselves giving in to the emotions of the moment -- pessimism when the market is down and optimism when the market is high. This leads to frustration as our misguided actions result in substantially lower returns than we could have achieved by just staying in the market.”
Here's Siegel's advice on how to be a successful investor:
-- Manage your expectations for returns. Keep in mind that historical returns have averaged between 6 percent and 7 percent.
-- Stick with stocks. “The percentage of your portfolio that you should hold in equities depends on individual circumstances,” he writes. “But based on historical data, an investor with a long-term horizon should keep an overwhelming portion of his or her financial assets in equities.”
-- Go low. Siegel recommends keeping the largest percentage of your stock portfolio in low-cost index funds. “By matching the market year after year, an indexed investor is likely to be near the top of the pack when the long-term returns are tallied.”
-- Think globally. The U.S. has about half of the world’s equity capital and it’s declining. So, he suggests a portfolio that includes stocks from Europe, developed Asia and emerging markets.
-- Fight your feelings. “Swings in investor emotion often send stock prices above and below their fundamental values,” he writes. “The temptations to buy when everyone is bullish and sell when everyone is bearish are hard to resist.”
History tells us there are likely to be more down and up days ahead in the stock market. But, Siegel argues, if you can ride the waves, you’ll ultimately increase your wealth.