Risk or Safe?

In 1929, John Raskob had a sexy wife, smart kids and a great job. He was the chief financial officer at the world's largest company, General Motors.

Then he did a silly thing. He offered this advice to anyone who would listen: Invest just US$15(S$24) per month in stocks. In 20 years, it will grow to US$80,000.

That translates to a super high annual return of 24 percent. But in the booming 1920s. It was believable.

On 3 Sep 1929, just days just after his comments were published, the Dow Jones stock index hit an all-time high of 381(Today it is over 11,000)

Two months later, US markets crashed. Then over the next two years, shares lost 80 percent of their value. Millions lost their life savings and Mr Raskob's advice was ridiculed. How can you be so wrong?

Today, if you had stuck with Mr Raskob's advice, you would have done all right. Your US$15 per month would have grown to US$17,000 in 20 years and US$65,000 after 30 years.

That's a return of 13 percent per year, which is less than the 24 percent Mr Raskob forecasted. But it is respectable and far exceeds "safe" investments like bonds which earned just 3 percent over the same period.

The lesson from this amazing story is that risky investments are not risky in the long-run. To prove it, we need data from the US. Since 1926, US stocks have out-performed bonds 80, 90 and 100 percent over periods of 10, 20 and 30 years.

In fact, there has never been a 30-year period when stocks have lost money or even earned less than bonds. Returns to stocks averaged 10 percent against 5 percent for bonds.

We think of bonds, savings accounts and fixed deposits as safe. It turns out, however that the safest way to preserve your wealth is to buy and hold a diversified portfolio of stocks.