World markets have been in turmoil recently, as bad inflation news in the United States, coupled with Dr Alan Greenspan’s speech about the market and financial risk last week, spooked many investors.

On December 5, 1996, it was "irrational exuberance" that might have caused a crash. This time, the Federal Reserve’s chairman wondered whether a kind of "claustrophobia" might do the same thing. The resultant market turmoil has bears squealing with delight. At last, the "correction" they have been waiting for seems near.

In my book, Dow 36,000 (Times Books), which James Glassman co-authored, we tell long-term investors that making money in the stockmarket isn’t easy. To do it, you have to hold on to stocks when everyone is running for the exits. That can be hard work. At times like this, it is useful to review why that strategy has always been a winner.

The first thing to remember is that stocks are very risky in the short run, but not in the long run. In the US, there has never been a 17-year-period where investors in stocks lost money, even after taking into account the effects of inflation. The same can’t be said for bond investments. Stocks don’t go up and down. They go up and down and then up again.

The second thing to remember is that there is a very good reason for the long-run reduction in the risks associated with holding stocks. Successful firms grow their profits and dividends each year, and, through the miracle of compounding, that growth makes a huge difference over time.

Consider a typical firm, Chrysler, the US auto maker that recently merged with Mercedes Benz. In 1977, a split-adjusted share of Chrysler cost about $US 2.81. The dividend per share was about US 20¢, making the yield about 7 per cent. Things turned sour for Chrysler quickly. By 1980, the company stopped paying dividends altogether and didn’t start again until 1984.

But from then on, the dividend grew a little bit each year, and by 1997, it climbed to $US 1.60 per share, an incredible 57 per cent of the 1977 purchase price. Investors who put $US 1,000 into Chrysler stock in 1977 received a dividend in 1997 alone of $US570!

Forget the Daimler-Chrysler merger for a moment. If Chrysler’s dividend were to grow at the same rate for 10 more years, the dividend in the 30th year would be higher than the return of capital for the poor sucker who bought a 30-year treasury bond in 1977.

Given that amazing growth, Chrysler’s share price has been pulled up by an irresistible force, despite the momentary corrections. Indeed, if the price had not increased, the stock would be yielding an absurdly high amount today.

It amazes some—and confounds the bears—but the Chrysler story is representative. Dividend and profit growth have been high and reliable for the market as a whole for more than a hundred years.

So what is Dr Greenspan worried about? He argues that panics happen from time to time, and one shouldn’t let analysis of a reassuring past lull one into a false sense of security. For banks, this means that they should be aware that sudden drops are still part of the scenery, and they should not ignore risk associated with them.

Certainly, individuals should not forget that corrections happen, and they should be prepared to hold on when they do. The best way to accomplish that is to ignore the blips. Instead of worrying about your investment this week, go to a museum or a concert!

And remember, when you buy a stock, you are buying a fraction of a firm’s future stream of profits. So long as earnings and dividend growth continue to be as healthy in the future as they have been in the past, there is no reason to be alarmed by short-term fluctuations like those experienced last week.

Indeed, there is now a sale on future dividends in the US market. Buy while they are still 10 per cent off!

Kevin Hassett is a resident scholar at AEI and the coauthor, with James K. Glassman, of Dow 36,000.