Invest Smartly, Choose Stocks for the Long Run originally posted at Become A Better Investor
Now in its fifth edition, Jeremy Siegel’s investment classic should be considered required reading for any and all types of investor. Siegel is the Professor of Finance at the University of Pennsylvania in Philadelphia, Pennsylvania. The basic theme throughout the book is simply that stock returns beat the returns of other asset classes such as bonds or gold in the long run.
The Children's Investment Fund Management LLP is a London-based hedge fund firm better known by its acronym TCI. Founded by Sir Chris Hohn in 2003, the fund has a global mandate and supports the Children's Investment Fund Foundation (CIFF). Q3 2021 hedge fund letters, conferences and more The CIFF was established in 2002 by Hohn Read More
I used this book as a desk reference, long before I had access to charts and data online. It helped me understand what type of long-term return that I should expect. I have gone back to it time and again and have never been disappointed. One message that I got from it was a chart related to long-term returns (back to the 1800s) in emerging markets. The message was that it is not as profitable as I thought because the massive growth periods were offset by subsequent busts and also by periods of heavily dilutive capital raising over time.
This book is intended to give a deep appreciation of the historical returns on stocks and bonds. Siegel’s text will help you use this knowledge to improve your finances and better navigate the markets in front of you by guiding you to a better understanding of the socioeconomic system out there.
Here in his book on stocks, Siegel covers every type of serious event and variable that could have an effect on an investor’s diversified portfolio. He demonstrates his points forcefully with historical data and mathematical analysis to back his theses. He argues for making the contrary decision and recognizing the pitfalls of following a crowd; choosing not to indulge in popular trends in favor of long-term planning.
Using historical data, investors can compare the total real returns for combinations of assets over single or multi-year periods of up to 30-year time frames. He uses the 30-year example for stocks, to demonstrate that equity risk falls by 75% over this period compared to the risk of bonds or Treasury bills. He follows this by stating that the minimum risk an investor can achieve is by combining a mix of stocks and bonds in differing proportions.
Long-Term vs. Short- Term
Siegel looks at the long historical view—from the beginning of the American Republic. He demonstrates that in the US over periods of five years and longer, real stock returns (after inflation) stray from their mean return (6.5%) less and less until at thirty years the observed deviations are half what standard statistics expects them to be. Therefore, stocks are much more volatile short-term and much less so in the long-term.
Diversify Your Portfolio
Siegel makes a convincing case that for long-term growth stocks are the best asset class to hold, but as stated he also argues for risk mitigation. Diversification is the best way forward to achieve this. This requires investments in bonds and all types of US equities—growth, value, large and small-cap plus non-US shares too. The right mix, tailored to your risk tolerance will form the foundation of your solid investment portfolio.
Siegel recognizes that investing is both a rational and emotional experience. Investors can improve their performance by avoiding sentiment and following these crafted guidelines. Shape your portfolio to be individual to yourself with your own risk level in mind- using the tools in this book will benefit and help guide you to make more informed investment choices for your financial future.
Haven’t read it yet? Check it out!
Have you read Stocks for the Long Run? What do you think about it?
Share your thoughts in a comment below…
DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article.