#1 – Stocks (Stock Mutual Funds) offer the best opportunity to participate
in the long-term growth of the economy. 

If you believe that the world and American economy will continue to expand over the years, the best way to participate in that growth is to own common stocks.  Stocks have historically delivered significantly higher returns than other asset classes over long periods of time, even after factoring in taxes and inflation.

Expect some bumps along the road. Even though we have gone through stretches of dramatic decline with wars, recessions, political and economic disasters, bear markets, layoffs, the market has responded in an upward-trending path.  

Over the long haul, your enemy is not a bear market, but investing too conservatively.   Stocks have beaten bonds and cash (such as bank certificates of deposit or money-market funds) in 85% of all ten-year periods since 1926—and in 98% of twenty-year periods. 

Stocks have returned an annualized 10.7% since 1926 (12/31/2001).  That’s nearly double the 5.4% average return on bonds over the same period.  Meanwhile, inflation has eaten away 3.1% of those returns.  So, after inflation, stocks have returned more than three times as much as bonds.  The risk is being out of stocks.

On average, bonds have returned only about 5% annually, while cash has returned just 3.8%.  With inflation averaging 3%, it’s easy to see that neither bonds nor cash has a chance of doing more than just keeping ahead of inflation.  But, that doesn’t mean that you should ignore bonds (see point #3). 

Stocks has great long-term records, but over the short term the market can be a roller coaster.  In their worst year (1932), stocks plunged 43.3%.  The 1990s  as a whole,  was the best decade in stock history.  Many professionals acknowledge that the five-year string averaging more than 20% annual returns that we enjoyed from 1995 through 1999 was probably a once-in-a-lifetime phenomenon.