Is Jeremy Siegel Right About Stocks for the Long Run?

In early May, while attending the Investments & Wealth ACE Academy conference in San Diego, I heard Jeremy Seigel deliver the opening keynote. Two of his comments on the risks of owning equities over the long-term were controversial and worth exploration. He said, “Stocks are the most volatile asset in the short run, but the most stable asset in the long run,” and, “While stocks were not a great inflation hedge in the short run, in the long run they were perfect.” (He emphasized perfect versus good or great).

The key theme of his comment was that the risk of owning equities declines as the time horizon increases, an effect often dubbed “time diversification.” I will explore those comments using historical data. I will demonstrate that evaluating the historical performance of equities depends on the definition of risk. When using appropriate definitions of risk (e.g., downside risk versus standard deviation) and wealth (incorporating inflation), the empirical evidence supports Seigel’s general assertion. But the inflation-hedging benefits of stocks aren’t perfect.

The long-run risk of equities

There is disagreement among academics about how the risk of equities changes over longer investment horizons, an effect commonly dubbed “time diversification.” One of the most notable advocates of the view that the risk of equities declines over longer horizons is Jeremy Siegel, as suggested in the title of his best-selling book Stocks for the Long Run. In that book, Siegel relied heavily on historical U.S. data (i.e., empirical outcomes) to make his case, as he did during his recent presentation.

To extend Siegel’s findings to international markets, Michael Finke, Wade Pfau, and I explored this effect in some research published roughly a decade ago. We relied on returns from the Dimson, Marsh, and Staunton dataset, which spanned 20 countries from 1900 to 2012. Consistent with Siegel’s findings, we found that returns for equities increased over longer time horizons across most markets. For virtually all risk-aversion levels, our findings were consistent with Siegel’s.