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OBSERVERS SING THE SAME TUNE: STOCKS ARE BEST

Buy stocks. Those two words probably sum up, better than anything else, the accumulated wisdom of academics who've studied the behavior of markets.

Now a new book, "Stocks for the Long Run," by Jeremy Siegel, a professor of finance at the Wharton School, lends further weight to that tenet.Siegel starts with what many investors already know: Large-company stocks from 1926 through 1993 returned an annualized average of 10.3 percent, compared with only 5 percent for long-term bonds, according to Ibbotson Associates. Inflation, meanwhile, averaged 3.1 percent.

But the stock market went down in more than one-quarter of those years. That's why experts caution that stocks should be long-term investments - that is, held for periods of five years or more.

Over rolling, overlapping five-year periods, such as February 1982 through January 1987 and March 1982 through February 1987, the odds of coming out ahead were much better: Stocks showed a loss in only 11 percent of five-year periods since 1926. Longer holding periods were better.

During overlapping 10-year periods, stocks lost money only 4 percent of the time. And during overlapping 20-year periods, stocks always finished in the black.

While the period since 1926 may seem like a long one, skeptics question whether it's long enough. After all, just because stocks proved the best investment of the last 65 or so years, what's to say they'll be the best investment of the next 20 years?

Siegel's book addresses that long-range perspective. He traces U.S. stock returns from 1802 forward and examines German and British stock markets since 1871.

Strikingly, Siegel finds that the average annualized return of stocks after inflation was just about the same between 1802 and 1926 as it was between 1926 and 1993. And long-term returns of British stocks were about the same as U.S. stocks, while German stocks lagged only a little.

"It's remarkable, that stability of return," Siegel says.

On average, stocks returned about 6.5 percent to 7 percent after inflation from 1802 to 1926.

By contrast, bonds returned about 4 percent to 4.5 percent after inflation - more than they've returned, on average, in modern times, but far less than stocks.

"The message for investors is, if you're planning for retirement - no matter how conservative you are - you should think seriously about putting a substantial portion of your assets in stocks," Siegel says.