A brief history of stock investing

Long-term returns of stocks Hi I'm David Luhman and welcome to "Stock Investing for Everyone". In this tape I'd like to introduce you to the opportunities and risks afforded by investing in common stocks. Let's begin by taking a look at why someone would want to invest in stocks. The obvious answer is to make money. Stocks have been the best long-term investment of this century. Over the past 70 years, stocks have given an average annual return of about 10 percent, long-term bonds about 5 percent, and short-term debt about 4 percent. Inflation during that period averaged about 3 percent per year, so only stocks have beaten inflation and taxes by a good margin. And because of the power of compound growth which I discuss in my tape on retirement planning, this slight difference in returns translates into much more wealth over a long period of time. If you had invested $10,000 in bonds returning 5 percent 30 years ago, your investment would have grown to about $43,000. However if you had invested $10,000 in stocks returning 10 percent 30 years ago, you would have $170,000 or four times as much. Investing in an asset with a slightly higher rate of return compounds into a large difference over time. Volatility of stock markets But this higher return comes at a price. Investing in stocks involves more short-term risk than investing in bonds. Bonds face risks in the long run because they don't keep up with inflation, but stocks can be risky in the short run. Over the past 100 years the Dow Jones Industrial Average has seen 24 turbulent cycles, so the average market cycle lasts about four years. In each cycle the Dow Industrials lost an average of 35 percent. These bear market losses tend to be short, and sharp, with each downturn lasting about a year. However the market usually makes up these losses and more in the upleg of each cycle. The average upside move typically lasts about three years, with an average gain of about 100 percent. Stock returns in the 1920s Now let's take a look at the recent history of stock investing. The 1920s were a great time for stocks. The inflation that came to America after World War I disappeared during the 1920s. As long-term interest rates dropped in the US during the 1920s, stocks became increasingly attractive. The Great Depression This lead to the bull market of the 1920s, which of course culminated with the stock market crash of October, 1929. The crash of October 28th was steep, with the Dow falling 13 percent, and then falling another 12 percent the next day. Stocks in the 1950s Growth in stock earnings Stocks in the 1970s Nifty Fifty stocks 1970s stagflation Copyright 1997 by David Luhman http://moneyhop.com/scripts/stocks/020-a-brief-history-of-stock-investing

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