Chart of the week
Stocks for the long run, but....
What does this chart show?
A total global stock portfolio has experienced three decade(+) zero real return environments over the last 94 years - from 1929-46, 1966-82, and 2000-2013. In 45 years out of the 94, stocks underperformed Treasury bills.
Why does it matter?
All risk factors, including the equity risk premium, have undergone prolonged, decade(+), periods of dramatically bad performance. For stocks, these periods have often been kicked off by violent, wealth destroying drawdowns. Even when considering a relatively more mild example, like the NASDAQ’s -33% performance last year, the index is still in the red since the beginning of 2022 despite a +39% performance year to date. These periods should be expected for investors choosing to concentrate their investments in a particular risk factor.
Young investors are often given the advice to invest entirely in stocks to build their wealth because they have a long time horizon and the ability to take more risk. This advice is predicated on the total real historical return of the stocks, which has been 5% since 1900, but neglects the likelihood of poor investment behavior during major stock drawdowns and the fact that most investors investment time horizon may begin or end directly during one of these zero real return environments, significantly degrading the terminal wealth of the investor.
The Bottom Line
Diversifying your portfolio with a thoughtful mix of assets that are biased to perform well during high & low growth and high & low inflationary environments, and acknowledging that you can’t predict which environment will transpire next, is the key to long-term investing success. The hype around concentrating your investments into a single risk factor is great….until it’s not.
Chart & Data Sources - The great Bob Elliott, CEO & CIO of Unlimited Funds