The Future for Investors by Jeremy J Siegel

Author:Jeremy J Siegel [Siegel, Jeremy J]
Language: eng
Format: epub
ISBN: 9780307236647
Publisher: The Crown Publishing Group
Published: 2005-04-15T04:00:00+00:00

Stock Returns Without a Great Depression

The impact of bear markets on long-term investors is far different from what most investors believe. Consider the following hypothetical history.

Imagine that the Great Depression had never occurred and, in fact, there never was an economic downturn. As a consequence, assume that stock dividends, instead of dropping sharply, made a smooth ascent from 1929 to 1954, and stock prices, instead of plummeting, remained stable.1 Obviously this scenario would have been far better for the country, as the massive unemployment, bankruptcies, and economic hardships that had occurred during the 1930s never would have existed.

Yet this rosy economic scenario would have been far worse for long-term stock investors. Although the market would have reached the same level by November 1954 in either scenario, the returns to shareholders would have been far different. As Figure 10.1 shows, $1,000 invested at the market peak would have turned into only $2,720 in November 1954 had the Great Depression never occurred. This is 60 percent less than what investors actually accumulated as a result of this economic catastrophe.

How could this happen? Although dividends declined a whopping 55 percent from their peak in 1929 to their trough in 1933, stock prices fell even more. As a result, the dividend yield on stocks, which is critical to an investor’s total return, actually rose. It is true that shorter-term investors were indeed worse off between 1929 and 1949 because of the Depression, and twenty years is not an insignificant period of time. But for those who persevered, the extra shares purchased during the bear market caused their returns to rocket ahead when stock prices finally recovered.

FIGURE 10.1: ASSET RETURNS BETWEEN SEPTEMBER 1929 AND NOVEMBER 1954

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