The manner in which Jeremy J Siegel presents his ideas in the book Stocks for the long run is simply amazing. The concepts of the stock market are relayed to the reader in a simplified way; even a layman who has never attended any finance lecture can grasp the concepts without too much struggling. Why? The simplicity of the method of relaying the concepts. Siegel advocates holding stocks for the long run and goes ahead and shows us some already analysed data complete with their respective graphs. I support his opinion that stocks are a good investment in the long run. The truths and facts explored in the book are indeed true in the real financial world.
Well, having the benefit of hindsight, we could explore some of the returns we would get had we invested in some shares. What would have been profitable and when was the best time? The period between 1945- 1951 proved to be the most appropriate time proved to be the so far from the period 1945- 2015. The stock prices were at record time lows and that would have been a good time to buy shares. Returns of times a thousand were possible if you held onto the stock for that whole period. On the other hand, I think 2015 was the worst time to get into the stock market. The stock prices had sky rocketed and I believe it was the pick of a bullish trend over the last ten years. For example, from Graph 2, 1999 was at the peak of a bullish trend and 3 years later, the stocks had lost half their previous value. I think such a trend would replicate after the 2015.
Risk can be greatly reduced by diversification. There are numerous ways of diversifying ones stock portfolio. Investing in a longer period is one such method. When one holds onto their stock for longer periods, theyre entitled to benefits like dividends etc and the risk involved with ones portfolio is greatly reduced. With reference to Graph 3, it is quite evident that a trend is forming. The longer you hold onto the stock, the lower the standard deviation. High standard deviations arent a good thing since it means theres high volatility. Some may argue that that would lead to greater losses but we have to consider the potential losses that could have been incurred. The ten year period between 2006 and 2015 was the best period with the highest returns. Likewise, the period of 1945-1954 was the worst since the returns were really low.
Never put all your eggs in one basket. The other way a wise investor can diversify his/ her portfolio is by having diversity meaning, one not only has stocks, he / she also has bonds. Graph 4 shows the advantages of holding onto the stock. The returns are great. Graph 1 shows that stocks were far much better than the bonds.
In conclusion, it is evident that Siegals proposition that stocks pay off when held in the long run is true as shows by these graphs. Using such an elaborate analysis, one is convinced to get in a stock position for the long run. From the graphs, its clear that the past is a determinant of the future. Its prudent to know which signs caused market crash so that once similar signs appear in the future, one can avoid major losses.The trends and cycles tell it all.
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