For as long as I’ve been paying attention, which admittedly is only the last ten or so years of my total thirty-four, personal finance experts have been extolling stocks as the best long-term investments. Over long periods of time they provide more growth than any other type of investment like bonds, with an expected rate of return of 8%, 10%, or 12%, depending on whom you ask.
This has been consoling advice, because with these returns, investing in stocks is the only way most people will hope to build a moderate amount of wealth for enjoying retirement. That’s not to say there aren’t other paths. Starting a successful business, winning the lottery, and inheriting a fortune are often cited as methods of building wealth but the reality is most people will not make those achievements, and those who do have a strong probability of losing the wealth quicker than expected.
After the recession, the idea that investing in the stock market will be profitable in the long run is a tough sell. Those selling the idea the loudest are often people in the industry — they make money when people invest. For example, Money Magazine asked Roger Ibbotson whether investing in stocks now — or ever again — is a good idea. That’s like asking the Dan Akerson, the incoming CEO of General Motors, whether it’s a good time to buy a car. (Hint: he’ll say it is.)
In the 20th century, stocks in the United States had a number of positive influences:
- the meteoric expansion of the economy,
- the emergence of the United States as the primary world power, and
- the gradual increase in public involvement in the stock market.
These could be the greatest factors in the stock market’s proven ability to provide high returns. These advantages have all run out, however. With the expansion of the economy, labor in the United States is now expensive relative to countries with emerging economies. There’s only one direction the most powerful country can move when it eventually does. And while there is still some room for more Americans to enter the stock market, involvement seems to be saturated. Investing in the stock market was once the realm of the privileged, but now just about anyone can trade as often as they like with the help of discount brokers.
I’m still betting on stocks for the long-term, but I’ll be ready to accept returns less than what the personal finance experts have traditionally promised. I’m also not sitting around, accepting paltry cost of living salary increases each year. I’m saving as much as possible for the future — while still enjoying some of my present. What’s your approach, and do you think stocks are past their prime?
Published or updated August 23, 2010.