On July 11, 2020, in a column by Jason Zweig, the WSJ asked, “Does Stock-Market Data Really Go Back 200 Years?”

Here are some quotes from this article:

The common stock emperor has no clothes
… brokers and financial planners keep reminding us, there’s almost never been a 30-year period since 1802 when stocks have underperformed bonds.
  …These true believers rely on the gospel of “Stocks for the Long Run”, the book by finance professor Jeremy Siegel of the Wharton School at the University of Pennsylvania …
  Another emperor of the late bull market, it seems, has turned out to have no clothes.

The article points out, what many have known for a long time — it simply is not true that a diversified portfolio of common stocks, if held for the long term, will almost always out-perform bonds.

This is what is called on these pages, The Common Stock Legend — an academic fantasy based on faulty statistics and sloppy reasoning.

Blind faith in the “Common Stock Legend” has led millions of investor-sheep down the road to perdition, culminating in the Crash of 2008 and the wreck of many retirement plans.

A sign of the times

Now, Jason Zweig, the author of this article, is not really a leader in critical investment thinking, but rather a follower — and this is what makes this article all the more interesting.

I regularly read Mr. Zweig’s column to keep informed of commonly-held investment beliefs.

Even Professor Siegel has long had second thoughts about the matter, as indicated in the article, “Common Stock Legend: Professor Siegel’s Epiphany”.

The fact that the Common Stock Legend was based on faulty statistics has long been known.

That the Wall Street Journal would put this in a headline (even followed by a question mark) indicates that the long-held doctrine of blindly holding “Stocks for the Long Run” is not such a good idea after all.

When this trickles down to the least informed of common stock investors, market behavior will change; flows of funds will be altered.

The Crash of 2008 seems, indeed, to have been a cusp of history.


In a recent study of the effect of the retirement of Baby Boomers on the price of equities, the GAO based its conclusions on the assumption that equities will provide real returns of over 7% over the next decades, stating:

Implanting False Hope
Implanting False Hope

“Returns on investment are important in helping many Americans accumulate sufficient savings throughout their working lives to meet their retirement needs. From 1946 to 2004, U.S. stocks have returned an average of 8.0 percent annually, adjusted for inflation.”

“According to a recent study surveying the literature, such simulation models suggest, on the whole, that U.S. baby boomers can expect to earn on their financial assets around half a percentage point less each year over their lifetime than the generation would have earned absent a baby boom.”

The GAO conclusions were dependent upon investors earning at least 7.5% per year on equity holdings, after inflation, for the foreseeable future.

Is this projection reasonable and is it based on fact?

And, why is this important?

Where Expectations of Market Returns Come From

The $14.9 trillion market value of US domestic equities (Q1 2006) is predicated upon common expectations of future returns on stock investments. The GAO figure of between 7 and 8% (real returns) is representative of current market consensus.

If this general expectation were to be significantly reduced, a loss of several trillion dollars of market value would almost inevitably follow. Holders of US equities would become much poorer should there be a substantial reduction in commonly projected long-term returns on equities.

A reduction in this widely-accepted projection would also impact heavily on defined-benefit pension funds and the savings plans of millions of households.

So how is it that millions of investors have come to believe that investing in stocks will produce long-term real returns of over 7% per year? After all, no one knows what the future holds.

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In July 2006, the GAO issued a seventy page report on the Baby Boom Generation, with the headline conclusion, “Retirement of Baby Boomers Is Unlikely To Precipitate Dramatic Declines in Market Returns, But Broader Risks Threaten Market Security“.

The GAO Enters The Fray
The GAO Enters The Fray

A careful reading of this report shows that the conclusions were based on the following studies and observations by the Government Accountability Office:

  1. Many people on Wall Street who were interviewed said that there was nothing to worry about.

  2. Two-thirds of Baby Boomer assets are held by 10% of the population who the study concluded are so rich that they won’t need to sell stocks when they retire.

  3. One-third of Baby Boomers don’t have any stocks at all, so they won’t be able to influence the market by selling.

  4. Many economists performed regression analyses on past market data, while others developed simulation models of how they expected the market to operate over the next generation, and none of these experts could seem to find any provable relationship between the impending retirement of the Baby Boomers and stock market returns — with half of their results correlating to ‘unknown factors’.

  5. The Baby Boomers will retire gradually over a generation, so the impact of their retirement on the market will never be sudden.

  6. If the Baby Boomers think they are running out of money, they will just postpone retirement, get a job, or spend less, rather than sell stocks.

Thus the government has entered to fray about the Baby Boom Bomb, already noted in a previous article covering the debate between Professor Jeremy Siegel and Michael Milkin.

The GAO’s conclusion seems to be: Don’t Worry, Be Happy (Maybe).

Flaws in the Government’s Argument

Perhaps the greatest error in the GAO study is the underlying assumption that without a massive sell-off by Baby Boomers, there can be no ‘melt-down’ in equity prices.

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