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Stocks For Real Long-Term Growth

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
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History has shown that stocks are simply the best investment medium to secure your financial well-being. Simply, no financial investment does better than stocks.

For the period 1995 and 1996, the U.S. stockmarket has produced cumulative returns of nearly 70%, a reason for many stock investors to cheer. The soaring KLSE in 1993 and positive performance last year had most investors smiling all the way to the banks.

Feeling adventurous enough to make a big swing in the stockmarket? If you had invested in the KLSE somewhere around April, you would probably have a very good reason not to cheer.

Losing some money in any stockmarket is inevitable. You cannot be right on the market all the time. Like people, stockmarkets have both good and bad times. Despite all the hiccups in short periods, stocks remain as key investments for most people.

Various studies support the fact that stocks have almost always outperformed other instruments over the longer term. Let us examine some selected historical studies conducted to show the performance of the U.S. stocks to see if this view is supported. The U.S. stocks, a reflection of a matured and fundamental-driven financial environment would be our preferred choice for illustration.

Over 10-year periods, stocks in the U.S. have almost always outperformed bonds leaving bank accounts in the dark The most widely cited Ibbotson study in Table 1 shows that stocks in the U.S. historically perform better than other selected instruments over the long-term.

Note also among different instruments, stocks have the highest risk as measured by standard deviation but if you invest for long term, you will likely see a smoother curve on the horizon - forget short-term volatility.

Table 1. Summary Statistics of Annual Returns (1926-1990)


Series

Compounded annual rate of return (%)

Average yearly rates of return (%)

Standard Deviation
(%)

Common stocks

10.1

12.1

20.8

Small company stocks

11.6

17.1

35.4

Long-term corporate bonds

5.2

5.5

8.4

Long-term govt. bonds

4.5

4.9

8.5

Intermediate govt. bonds

5.0

5.1

5.5

U.S. Treasury bills

3.7

3.7

3.4

Inflation

3.1

3.2

4.7


Source: SBBI 1991, Yearbook.



In addition, table 2 shows the stocks compound annual rates over the decades generally outpaced inflation. Remarkably, large stocks (S&P 500) outperformed inflation by nearly 12.4% in the 1980s.



Table 2. Compound Annual Rates for Decades


Source: SBBI 1991, Yearbook.

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