When the market takes a nosedive, many people snatch their remaining dollars from the stock market, from fear of losing even more. Some then park the money in CDs at their bank. Others may start looking at real estate. And even others will flock to gold. 

After all, gold has a reputation of being a safe and effective place to invest. But over the long run, it hasn't been so great. A few years back, University of Pennsylvania finance professor Jeremy Siegel, in his seminal book Stocks for the Long Run, showed what a dollar invested in gold (and some other things) would have grown to, from 1802 to 2001. Amounts have been adjusted for inflation.

  • Stocks: $599,605
  • Bonds: $952
  • Bills: $304
  • Gold: $0.98

Yes, you are seeing what you think you're seeing. Sure, stocks go through slumps, just as they are now. But over a 200-year stretch, an investment in gold would have lost you money.

Historical returns
Of course, during certain periods, gold has surged and rewarded investors richly -- if their timing was good. Just look at recent history: In 2005, the price of gold per troy ounce was below $500. Early in 2008, it soared above $1,000, then dropped to around $700, and now sits at around $875. Someone who'd been excited by gold's ascent might have bought in at around $1,000, only to see the price plunge by some 30%. And if this person decided to bail out at around $700, he or she would have missed out on gold's recent jump. What headaches!

We've seen recently that the stock market can be volatile, but don't kid yourself -- gold is not free from volatility. Check out these closing spot prices for gold in years past:

Year

Closing Spot Price of Gold

2008

$884

2004

$436

2000

$273

1993

$392

1987

$487

1985

$327

1980

$595

1976

$134

1970

$39

1960

$37

1950

$40

Data: onlygold.com.

See? Buying gold won't spare you from volatility. If you held gold from 1950 to 1980, you'd have increased your investment's value nearly 15-fold. That's great, but over 30 years, that amounts to 9% per year, on average. Between 1950 and 1970, you'd have lost money. If you'd held for the 20 years between 1988 and 2008, you'd have earned an annual average of about 4%.

The trick is to have perfect timing when investing in gold. But as with stocks, no one knows when the perfect time to buy and sell is, except in retrospect.

Stocks supreme
Let's wander back to Professor Siegel's data. Look at how much better the other investments did, especially stocks. Even though the data goes only through 2001 and misses the stock market's recent negative performance, it still emphasizes that over the very long term, the stock market has averaged a much better return than other assets, including gold.

Invest in a broad-market index fund, and you can earn the market's return for yourself. You might consider aiming higher by carefully choosing some managed mutual funds or individual stocks. For instance, you might look for companies you know and understand, and then research them well, to make sure they're healthy and growing and are priced attractively. It's true that most companies' short-term performances won't seem impressive -- Campbell Soup (NYSE:CPB), for example, averaged a 4.7% gain over the past five years. But that's still some eight percentage points ahead of the S&P 500. It's all relative!

Let's look at some longer-term performances of some familiar names:

Company

20-Year Average Annual Return

Campbell Soup

11%

Kroger (NYSE:KR)

13%

Clorox (NYSE:CLX)

13%

Sherwin-Williams (NYSE:SHW)

15%

Nucor (NYSE:NUE)

16%

Harley-Davidson (NYSE:HOG)

17%

Nike (NYSE:NKE)

21%

S&P 500 (excluding dividends)

6%

Gold

4%

Data: Yahoo! Finance.

The results for steel company Nucor make me smile. I can't help thinking of Machiavelli, who said, "The unarmed rich man is the prize of the poor soldier." He thought iron more handy than gold. When it comes to iron stocks -- or stocks in general -- maybe you should, too.

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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Sherwin-Williams is a Motley Fool Stock Advisor pick. Try our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.