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Are Stocks a Good Investment ?When thinking about investment trends, it is best to look into the long term returns and risk for each investment category. Luckily for investors, there are many studies that have looked at long term trends in stocks, bonds, and other investment vehicles. In terms of investing in stocks, the best of these is made by the Social Security administration, which has a PDF study available at ssab.gov/Publications/Financing/estimated%20rate%20of%20return.pdf There are many interesting findings in the study. According to the research, for the period from 1802-1997, the arithmetic average yearly return for stocks has been 8.5%, which the researchers suggest is the best estimate for the average return for the stock market on a yearly basis based on historical data. The compounded annual return, which the researchers use as a base for comparison later in the study, is 7% for the same period. Also, the researchers note that there is a lot of volatility the closer you look at the returns, with an annual standard deviation of real return of 18%. Another interesting point is that the underlying valuation models seem to change over time, with different periods on how earnings and expected earnings have affected the market price of stocks. Also, thinking about stock investing in perspective to treasury bonds, over the past two centuries, the realized premium (realized historical return on stock indexes vs return on treasury bonds) was 3.5 percent on average, but 5.2 percent for 1926 to 1998. Finally, the study concludes by stating that there are a lot of things that can make the stocks' future premium over treasury bonds less or more than what the it has been in the past. |