In his groundbreaking work "Stocks for the Long Run," professor Jeremy Siegel, of Wharton Business School, makes such a compelling case for stock ownership that one begins to wonder why everyone in the country isn't better off.
His analysis clearly shows stock returns since 1802 to be superior performers over bonds, gold, real estate and inflation. This period includes depressions, civil wars, world wars, credit bubbles, technology bubbles, zero interest rates and geopolitical upheaval.
So why isn't everyone better off if stock returns are so predictable?
One answer is human behavior. Some people are hard-wired to make irrational decisions during stressful periods in financial markets - selling low, for example. We saw evidence of this during the 2008-09 credit crisis, where years of thoughtful planning went right out the window as stock prices plunged during the fall and spring. Dollar-cost averaging and rebalancing into stocks at bargain prices, while difficult, seemed the only logical choice for long-term investors.
Another reason is poor planning. Investors who lack an investment plan are more prone to mistakes and emotional decision-making. We use investment planning software to illustrate this point during client reviews. By showing clients statistical evidence and historical returns, we illustrate how they could still achieve retirement or maintain living standards during retirement.
A third reason is the media, and the constant drumbeat of negative news. Bad news sells, and we have today an entire industry whose output and content is designed to make investors do the wrong thing at the wrong time.
I was recently interviewed on live television to discuss Ukraine and financial market volatility. The desired spin control had a negative bias. World War III, spikes in energy and food prices, and a return to the Cold War were all potential consequences of Russian policy.
I tried to emphasize the positive: Lower stock prices help investors buy a few more shares, or gold- and oil-based investments, and bonds went up. All well and good, but the emphasis was about the terrible things that could happen, despite stock indexes reaching record highs the previous week!
The truth is this: No one has any idea where stock prices are headed in the short run. Anyone who claims to have such knowledge should be avoided. We see many fundamental reasons to support higher stock prices in 2014 and beyond - improving economic conditions, record corporate earnings, rising dividends, consumer confidence, share-repurchase programs and low interest rates. Higher stock prices will be followed by corrections and volatility.
My belief is most people cannot achieve their financial goals without some modest exposure to stocks and better inflation-adjusted returns. There's a lot of room between 0 percent and 100 percent equity exposure in the household asset allocation.
Siegel did not get wealthy from his Wharton salary. He co-founded Wisdom Tree, an investment company dedicated almost entirely to worldwide stock investing.