Stick with stocks. (Scan).(investing)

The U.S. stock market has wobbled through this summer with some heart-stopping swings, scaring many investors in other directions. They are making a mistake. Under any sensible analysis of return and risk, a diversified portfolio of shares in good businesses remains the best long-term investment.

Ibbotson Associates, the Chicago research firm, found that from 1926 to 2001, the average annual return, after inflation, of the stocks in the Standard & Poor's 500 was 7.6 percent. This compares with just 2.2 percent for Treasury bonds. In other words, stocks return more than three times as much as bonds. Thanks to compounding, after 30 years, an investment of $10,000 in stocks will rise, on average, to more than $90,000, while a similar investment in bonds will rise to less than $20,000.

Higher returns are normally correlated with higher risk, but Jeremy Siegel of the Wharton School and others have found that if stocks are held over long periods, risk declines dramatically. Mr. Siegel looked at nearly 200 years, and found that during their worst 20-year period ever, stocks rose more than 20 percent. But for bonds, the worst 20 years produced a loss of 60 percent. Mr. Siegel concluded that "the safest long-term investment for the preservation of purchasing power has clearly been stocks, not bonds."

How can bonds be risky? Nearly all bonds are exposed to inflation, which erodes principal. Businesses can respond by raising prices, so stocks increase their earnings fairly consistently from year to year. Sure, there will be recessions and bad profit news from time to time. But in the end, the growing economy will pull firms' profits, and share prices, upward again.

On August 13, 1982, the Dow closed at 777. Even today, after the second-worst bear market of the post-World War II era, it has risen 11-fold without counting dividends. For the 20 years ending on December 31,2001, large-cap stocks returned an annual average of ...