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Core of the Story

Stocks Always Win in the Long Term

Many investment advisors and experts claim that while stocks may be risky in the short term, they are not in the long term. In the long term, they argue, stocks always beat less risky alternatives. As evidence, they point to the history of financial markets in the United States and note that stocks have earned a higher return than corporate or treasury bonds over any 20-year period that you look at since 1926. They then draw the conclusion that if you have a long enough time horizon (conservatively, this would be 20 years), you will always generate a higher ending portfolio value investing in stocks than in alternatives.

It is not just individual but also professional investors who have bought into this sales pitch. Following these pied pipers of equity, younger workers have invested all of their pension fund savings in stocks. After all, a 35 year-old investor will not be accessing her pension fund investment for another 30 years, a time horizon that should make stocks essentially riskless. Companies have reconfigured the contributions they make to pension plans on the assumption that pension plans will be invested predominantly or entirely in equities. By making this assumption of higher equity returns, they are able to lower their contributions and report higher earnings. State and local governments have used the same assumptions to meet budget constraints.


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