Stocks for the Long Run is a newly updated book from Jeremy J. Siegel that was originally published in 1994. Professor Siegel teaches at the Wharton School of the University of Pennsylvania and has written extensively for the Wall Street Journal and Financial Times. This post will be the Reader’s Digest review of the book and will highlight his 6 recommendations for investors and how we incorporate these recommendations for our clients.
The book is essentially an encyclopedia of knowledge concerning the global stock markets. As the book is nearly 400 pages, I thought it best to summarize his major findings. If you have a child or grandchild who is interested in the financial markets, the complete reading of the book will help them immensely.
As the title gives away the conclusion, he demonstrates with actual results how investors in the stock market have been handsomely rewarded. The key to earning these rewards is familiar to readers of this blog: Investor Behavior.
He updated his previous charts to the end of 2012, but the conclusions are the same as those published in 1994. His conclusion on how to own stocks is the same philosophy that we have preached through these numerous posts and how we invest for our clients.
He exposes how actively trying to pick individual stocks, either on your own or hiring a money manager to do so, has not been an effective use of time or money. He strongly recommends, and provides the evidence to back up his assertion, that the best way to capture the returns of the stock market is by owning a well-diversified stock portfolio.
to be a successful long-term investor is easy in principle but difficult in practice
Siegel encourages the use of a financial advisor who agrees with the basic principles of diversification and long-term investing that he discusses in the book. The reason being that a proper investment strategy is as much a psychological challenge as it is an intellectual challenge.
He concludes this well thought out and documented defense of the ownership of the great companies of the United States and the world – another way to describe “stocks” – by giving six guides to successful investing. After each recommendation, I address how we implement these recommendations for our clients. They are the following:
1) Keep your expectations in line with history. Historically stocks have returned between 6% and 7% above inflation over the past two centuries. At Crimmins Wealth Management, LLC (CWM), we use this historic stock percentage return as a guideline when developing our clients financial projections.
2) Stock returns are much more stable in the long run than in the short run. Therefore, if your investment horizon is longer, there needs to be a larger percentage of your assets in equities. At CWM, we allocate more money to stocks in the accounts with longer time horizons, such as Roth IRA or IRA accounts. We are also very aware of our clients life expectancies.
3) Invest a large percentage of your stock portfolio in low-cost stock index funds. At CWM, as a Dimensional Fund Advisor (DFA) in NJ, we use DFA institutional mutual funds to capture specific stock exposure across the globe, allowing for a well-diversified portfolio with institutional pricing.
4) Invest at least one-third of your equity portfolio in international stocks, or companies not headquartered in the United States. We ensure that all of our client portfolios have exposure to the other 6000+ companies housed outside the United States, depending on their risk profile.
5) Tilt your portfolio toward total value stocks which have historically provided superior long-term performance versus growth stocks. We incorporate this tilt in our client portfolio construction. Our client portfolios have tilts to the dimensions of the stock markets which have rewarded investors, namely value and small company exposures. These tilts are the hallmark of our partner Dimensional Fund Advisors (DFA) portfolios.
6) Finally, establish firm rules to keep your portfolio plan in place, especially if you find yourself giving in to the emotion of the moment. At CWM, this is why we set asset allocation percentages for all of our accounts allowing us to re-balance without the emotion of the moment. This allocation is documented in the client’s specific Investment Policy Statement (IPS).
For most of you this Reader’s Digest version of his book will suffice. For those who want a deep dive into the financial markets and how they have been able to provide investors with excellent returns through time, pick up the book for yourself. The updated book has an excellent account of the latest debacle which occurred in the 2008/2009 stock markets.
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