Perhaps the most comprehensive evidence I have seen is the research by Wharton Professor, Dr. Jeremy Siegel. In his book, Stock for the long run, Prof. Siegel compares the returns of different assets over the last two centuries (yes, you read that correct). See below Table.
Time: 1802 - 2001
Not adjusted for inflation
Stocks: $8.8 million
Bonds: $13,975
Bills: $4,455
Gold: $14
Adjusted for inflation
Stocks: $599,605
Bonds: $952
Bills: $304
Gold: $1
Stocks beat the pants off all other investments over the same time. Its not even close!
Critics will say that average investor does not invest for 200 years. Fair enough.
But research has shown that even for shorter periods like 5 to 10 years, stocks still outpace the other investments on average even though there may be periods of under performance.
Additionally, people correctly point out that real estate was not included in the above comparison. Investment in real estate is easier than ever with REITs (Real Estate Investment Trusts), which can be bought and sold like stocks. Another advantage of real estate is the extended returns one can achieve with leverage.
Jack Clark Francis at Baruch College, New York City, and Roger G. Ibbotson at Yale University compared real estate with 15 different "paper" investments – stocks, bonds, commodities and real estate investment trusts (REITs) from 1978 to 2004. They reported the following returns:
- Housing – 8.6%.
- Commercial property – 9.5%.
- The S&P 500 (proxy for stocks) – 13.4%.
In spite of the strong housing market of the last 2 decades, stocks still came out ahead. Additionally, stocks have several advantages – better performance, low costs, diversification and amount of effort needed by the investor - compared to real estate. The recent downturn in the housing market has shown us how difficult it is for some homeowners to sell their house in a down market.
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