One look at this 115 year chart of the Dow Industrials reveals that despite World Wars, Depressions and financial catastrophes, stocks have always produced outsized returns. Outsized returns for the very patient mind you, but outsized returns nonetheless. Take a look:

• The long-term, more than 100-year performance: Since 1900 (end-of-year 1899), through 2012, the average total return/year of the DJIA was approximately 9.4%  — 4.8% in price appreciation, plus approx 4.6% in dividends. 
• The average annual stock market return for the past twenty-five calendar years (since 1987) was 10.6% (7.9%, plus 2.7%)  The market was up over 40% before the October 19, “Black Monday,” crash. After a significant recovery, the Dow actually closed up 6% for the year. (For further time periods and statistics go to Observation HERE)

So even in an absolutely worst case scenario of an investor buying the index at the very peak of the Dow at 381 in 1929, that person would have been even index wise 25 years later and have well more than doubled (including dividends) long before the Dow hit its peak at 1000 in 1966.

In a better scenario you will get the likes of a quality stock buyer like Warren Buffet earning a 20% annual return over the period 1965 – 2012, a period that just happened to have one of the longest stretches of stock market underperformance between 1966 – 1983, not to mention the crashes of 1987 and 2008.

When you invest in stocks, you must know there will be periods when stock market returns will go negative, and you must accept the risk of occasional bear markets. But you do get paid for it through the “Equity Risk Premium. Or in other words you earn more in return for being willing to endure periods of loss. (Ed Note: Currently that premium is estimated be 5.5% over 30 year Treasury Bonds, or over the long term stocks will outperform Treasury Bonds by 5.5%)

Summary:

Over the long term at least, the return on stocks is greater than bonds. 

Current State of the Markets

The Central Banks zero (now minus zero) interest rates, stimulus from the ECB, China, Japan and directly and indirectly from the U.S. Federal Reserve will ultimately force equity prices higher. Nevertheless recent stock market gains lead me to believe that keeping 25% cash take advantage of any further selloffs is a good idea for now. Marc Leibovits recent advice is also very wise:

“eliminating long-term bonds from your portfolios, avoiding the most rate-sensitive sectors of the stock market, sticking only with the highest-rated stocks in powerful sectors experiencing their own private bull markets, and dabbling (gingerly) in the most beaten-down, dirt cheap stocks that already reflect a huge amount of pessimism.”

In my opinion some of those dirt cheap stocks definitely reside in the precious metals sector, and for those more cautious you can always use the options market to reduce your risk. 

Robert Zurrer