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Stocks: 188 years of outperformance.

History is not destiny but when it comes to the overwhelming evidence you're about to read, you may well believe that the past experience of investors world-wide is a window on the future.

The issue is the historical advantage that equity investing -- investing in a basket of common stocks -- has over investing in all other financial instruments.

A recent study conducted by the Wharton Business School in the United States has shown that U.S. stocks widely outperformed government bonds and gold, not just in the past two decades but over the last 188 years.

Using financial data collected since the beginning of the 19th century (when railway and financial stocks were the only equities traded), the study showed a single dollar invested in stocks in 1802 would have grown to almost $1 million by the end of 1990. The same single dollar invested in a long-term bond would have created a nest egg of only $5,770, while a gold bullion investment of one dollar would have grown to $15.80 over 188 years.

Another study, this one from the University of Western Ontario, shows Canadian stocks delivered an annual return of 10.47% over the past 42 years while treasury bills and long term bonds both returned less than 6% each on an annual basis.

Despite this data, many investors are still not sure history will repeat itself again in the 1990s and are opting to invest 100% of their portfolios in fixed income investments, or even deposit type instruments. They point out that in the last 10 years, bonds, mortgage funds and money market funds have all outperformed stocks.

But the truth is, the 1980s were an anomaly because interest rates grew

temporarily to more than 20% during the 1981 recession -- throwing the financial history books out of whack for the decade. This rate hike not only provided extraordinary high yields to investors, it also presented significant capital gains opportunities in bonds as rates declined. Most experts agree this is not likely to happen again in the 1990s. Recognizing this trend, the Wharton Business School, in its study, concluded that even if fixed income investments are better performers in the future than they have been in the last 188 years, "equities, however, still appear to be the best route to long-term wealth accumulation." And this is even before taking into account the built-in tax advantages of equity ownership versus interest bearing assets.

Although a well-managed investment of bonds still has real appeal -- and should be considered for part of every investor's portfolio -- all things being equal (and provided your investment horizon is sufficiently open), the superior choice for the long-term is equity investing.

If the lessons of the past provide clues for the future, the best advice we can draw from the past 188 years is to stay significantly invested in equity funds in the 1990s. We believe that history will repeat itself.
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Title Annotation:Strive
Publication:Manitoba Business
Date:Nov 1, 1992
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