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So Much to Like

Jonathan Clements

THE BEAR MARKET HAS now dragged on for 15 months—and no doubt plenty of anguished investors are second-guessing their allocation to stocks. But as for me, I grow more enthusiastic with every drop in the Dow Jones Industrial Average. In fact, I’d be happy to see the bear market last a few months longer, so I can finish fully funding various tax-advantaged accounts for 2023.

Not only are stocks better value than they were 15 months ago, but also the long-term benefits remain as impressive as ever. What benefits? Here are nine reasons I have 88% of my retirement portfolio in stocks.

1. Economic growth. Across the globe, billions of people strive every day to make their lives better—and, as an owner of stocks, I stand to profit from their hard work and innovation.

Consider the 50 years ended December 2022. During that stretch, nominal U.S. GDP grew 6.2% a year. Corporate profits grew even faster, notching 6.8%, and those rising profits propelled the S&P 500 to a 7.2% average annual share price gain.

The S&P 500’s performance was helped by a rise in the market’s share price-to-earnings (P/E) multiple, which climbed from 18.3 at year-end 1972 to 22.2 at year-end 2022, thus adding 0.4 percentage point a year to the market’s return. On top of the 7.2% annual share price gain, investors also collected dividends. The S&P 500’s dividend yield was 2.7% at the beginning of the 50 years and 1.7% at the end.

2. Faster compounding. Over the past 100 years, stocks have notched a total return of more than 10% a year. I wouldn’t count on earning 10% in the future—remember, rising P/E ratios and higher dividend yields contributed to that gain—but I would count on stocks beating bonds by perhaps three or four percentage points annually over the long haul. That might not sound like much, but the difference is huge when compounded over many decades. Let’s say stocks notch 8% a year, while bonds earn 5%. Over 30 years, stocks would soar some 900%, while bonds would gain just 330%.

Keep in mind that we’re talking here about the broad stock market. Want to be sure you’ll capture whatever gains the market delivers? Forget trying to pick market-beating stocks and sectors, because such efforts could derail your portfolio’s performance. Instead, it’s crucial to diversify broadly, preferably using total market index funds.

3. Unlimited upside. Got money you’ll need to spend in the next five years? You should have it stashed in nothing more exciting than high-quality bonds. But that comes at a cost: If you buy bonds and all goes well, you’ll get the promised interest payments each year and you’ll get back your bonds’ principal value when the bonds mature—and that’s it.

By contrast, with stocks, there’s no limit to how much you might make. Indeed, stocks offer a wonderful asymmetry: While the potential gain is infinite, the most you can lose is 100%—whatever sum you invested. Yes, in the short term, stocks are more likely to fall sharply than bonds. But in a worst-case scenario, such as a corporate bankruptcy, bondholders may also get wiped out, just like the company’s shareholders.

4. Heads you win, tails everybody loses. What if we’re talking about a truly worst-case scenario, such as a nuclear war, the overthrow of capitalism or a global economic collapse? Don’t kid yourself: It won’t much matter what you own, whether it’s stocks, bonds, bitcoin or gold, though a large stash of canned goods might come in handy.

What if catastrophe doesn’t strike and world economic growth keeps rolling along? A globally diversified stock portfolio should eventually emerge triumphant. In other words, stocks aren’t just the optimist’s bet. Arguably, they’re also the only logical bet for long-term investors—because, if the global stock market isn’t winning long-term, it likely means the worldwide economy has ceased to function and we have much bigger problems to worry about.

5. Tax-favored. If you hold stocks in a taxable account for the long haul, not only will your dividends and capital gains likely be taxed at the lower long-term capital-gains rate, but also you’ll largely control when your stocks are sold and hence when that capital-gains tax bill is triggered. In fact, if you hang on to your stocks and bequeath them to your heirs, the embedded capital-gains tax bill may never be paid, thanks to the step-up in cost basis upon death.

By contrast, the interest thrown off by savings accounts, certificates of deposit and taxable bonds is dunned at the higher income-tax rate, plus the bulk of your expected return is paid to you every year and hence there’s no built-in tax-deferral, like there is potentially with stocks. Of course, this tax disadvantage doesn’t matter if you hold interest-generating investments in a retirement account—which is why I have all my bonds in my traditional IRA.

6. Liquid. If you need to sell your vacation home to raise cash, it will likely take at least a few months to turn your property into a pile of dollar bills. By contrast, you can sell your stocks and stock funds whenever the financial markets are open. Admittedly, for those given to panicky decisions, this ease of selling is a mixed blessing. But for the rest of us, who want to invest for the long haul while also having the option to sell at short notice, the liquidity offered by the stock market is a huge plus.

7. Low cost. Again, this is where stocks rule and real estate stinks. When I sold my New York apartment in early 2022, I surrendered more than 8% of the selling price to legal fees, the real-estate commission, transfer taxes and fees, and more. And that, of course, followed years of property taxes, monthly building maintenance fees, repair costs, homeowner’s insurance and so on. By contrast, my Vanguard Group index mutual funds cost nothing to buy and sell, and the cost of holding them amounts to just $1 a year for every $1,000 invested.

8. Low minimums. According to the National Association of Realtors, the median sale price for an existing single-family home was $363,000 in February. Meanwhile, you can get started in the stock and bond markets for $1.

9. Easy to diversify. Because homes cost so much, it’s hard to build a diversified portfolio of properties. But thanks to mutual and exchange-traded funds, it’s a cinch to reduce risk by diversifying across bonds and stocks, including real estate investment trusts—a wise choice for those who like property ownership but don’t like fixing leaky faucets.

What does it take to enjoy the nine impressive benefits listed above? All that’s required is some upfront dough and a long time horizon. Sure, you have to sit tight through some occasional market unpleasantness. But I, for one, consider that a small price to pay.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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Richard Gore
1 year ago

For as often you promote changing your stock allocation based on current market conditions (i.e. market timing) it would be better if you posted your current stock on a regular basis since many of your followers are likely to follow your advice. Perhaps, you could report it monthly.

Jonathan Clements
Admin
1 year ago
Reply to  Richard Gore

Thanks for the snarky comment. Most commenters on this site manage to avoid sinking that low. I don’t engage in market-timing:

https://humbledollar.com/2022/10/my-investment-sin/

Kevin Knox
1 year ago

While I appreciate and agree with your long-term optimism about equities, I fear that some readers might think that being 88% in stocks as one approaches retirement age is a good idea for most investors, or that equity-heavy portfolios are the only way to enjoy sustained real returns and a decent safe withdrawal rate in retirement, or to leave a legacy. Nothing could be further from the truth.

Of course if your nest egg is large enough you can get away with just about anything (thus Warren Buffett’s famous 90% S & P 500/10% T Bills for his wife – because what’s a loss of a billion here or there to him – or her?). But for mere mortals looking at one’s equity allocation and imagining it losing 50% of its value at any time and not recovering for a decade remains sage advice about how much to allocate to stocks – especially in retirement where one has to spend steadily from the portfolio regardless of market meltdowns. Meanwhile the average 60 year old male in this country has 17 more years of remaining life expectancy. There is no “long run” in most cases.

There are at least a dozen well-known “lazy” portfolios that offer far better risk-adjusted returns, safe and perpetual withdrawal rates, and vastly lower and shallower drawdowns (the “ulcer” index) than the 70-80% global equity/20-30% short-term TIPS and nominal Treasuries you’ve been recommending in recent years. Among them: the (Paul) Merriman Ultimate, Golden Butterfly, Bill Schultheis’s Coffeehouse Portfolio, etc. For every risk-embracing 60 year old for whom 70 or 80% equities at age 60 makes sense there are a hundred folks who need to heed William Bernstein’s advice to ensure all their essential expenses are covered with TIPS, annuities and Social Security – and to “stop playing when you’ve won the game.”

https://portfoliocharts.com/portfolios/

Jonathan Clements
Admin
1 year ago
Reply to  Kevin Knox

Thanks for the comment. As I mentioned in the article, investors should have enough set aside to cover the next five years of expected portfolio withdrawals. Based on my current income, I have that and more. Others might want more set aside in conservative investments than that — but, as you suggest, that’s more about their risk tolerance and less about expected returns, especially returns when you’re starting from 15 months into a bear market. Meanwhile, 60-year-old males have more than 17 years of remaining life expectancy — 23 years, says the Social Security Administration calculator — and probably notably more if they’ve taken reasonable care of their health.

https://www.ssa.gov/cgi-bin/longevity.cgi

johny
1 year ago
Reply to  Kevin Knox

I could be wrong, but I think Jonathan is investing as a single person planning to leave a significant sum to the kids. With that in mind, 80% or more in stocks might not be an issue.

Last edited 1 year ago by johny
booch221
1 year ago
Reply to  johny

I could afford to do 80% stocks because I have a pension that covers my basic living expenses with some left over. But I choose a 50/50 asset allocation because it helps me sleep better.

macropundit
1 year ago
Reply to  booch221

I’m only a couple years from retirement but 100% equities make me sleep better. Good sleep is how comfortable you are with the poison you’ve picked.

1silverloon
1 year ago

Ahh! I always enjoy your articles, Jonathan. I’m retired, close to your age and thinking of increasing my AA to more stocks. By the way, I listen to every episode of “Down the Middle” please tell Peter Mallouk I appreciate his insight, his perspective and how he explains things in the most clear and logical manner. You both make a great team!

steveark
1 year ago

I don’t disagree with having a lot of index funds but I don’t think stocks are a bargain right now. They are still way overpriced and a decade of low, to no growth might be what it takes to rationalize stock prices. But if that’s the case it’s not big deal.

Kenneth Tobin
1 year ago

In Bogle’s books he says a 2% fee difference, 10 versus, 8 costs the investor 77% of his wealth over 40 yrs. He calls it the TRYANNY OF COMPOUNDING. Those who do not understand simple math are really losing billions of dollars to Wall St

SanLouisKid
1 year ago

I’m in the “deaccumulation” phase so bear markets are bringing my retirement plan more into focus. I constructed my mostly stock portfolio so that a 50% drop in value won’t affect my standard of living. That won’t be true for everyone. In fact, my sister, whose investments I oversee, contacted me recently to see if you (meaning me) should be doing anything with her Vanguard accounts. (Funny, she never contacted me when everything was going up.) I told her to just weather it out. Everything is going according to plan. I also know if things don’t work out, she’ll be coming to live with me, so like the touted “1% expense” guys who say they have “skin in the game,” I have skin in the game. But my sister gives me the perspective of those who are worried about market drops. As for me, I just read Jonathan’s good articles and “stay the course” and let my guy in Omaha with lots of cash handle any down-market purchases for me.

Boomerst3
1 year ago

The S & P is up 14% since last September. Still hasn’t made it back to the top, but trending in the right direction

jake
1 year ago

I agree that a large stock allocation is great while you are still accumulating for retirement! However, if you are in retirement and spending from your retirement accounts I would not be “happy to see the bear market last a few months longer.”

“THE BEAR MARKET HAS now dragged on for 15 months—and no doubt plenty of anguished investors are second-guessing their allocation to stocks. But as for me, I grow more enthusiastic with every drop in the Dow Jones Industrial Average. In fact, I’d be happy to see the bear market last a few months longer, so I can finish fully funding various tax-advantaged accounts for 2023.”

Michael1
1 year ago
Reply to  jake

It depends. Jonathan has a good reason to hope for lows he can take advantage of, and importantly also has a cash set aside for expenses.

I’m also hoping for another drop. I was about to harvest some tax losses but instead I waited for the market to drop further, and now have no more losses to harvest. I’m also holding enough cash that a deep or somewhat prolonged drop isn’t a worry.

If you have what you need to live on for the near future in cash, you can handle or even take advantage of market drops.

Boomerst3
1 year ago
Reply to  jake

When retired you should have some cash/short term bonds to supplement your income (if you need it) to cover you for a while should the market go down. Then you can wait out a market decline. Then you can leave your stock investments alone during a decline.

B Snyder
1 year ago

Hi Jonathan, Humble Dollar is great, and I read every issue.
I really like this article on stocks, and indeed the s and p just jumped this week.
But also, I really liked your article of perhaps 4 years ago or so, which commented (I’m paraphrasing), that “ when you’ve won the game, you can stop playing”. As a retired person, and fairly conservative with my investing, I found that article very interesting too.
Any comments, thank again for HD, Brian

Boomerst3
1 year ago
Reply to  B Snyder

This is relevant if you have all the money you need and want no more growth. Many in that category set aside enough so they will always have what they need, and then invest the rest.

Jonathan Clements
Admin
1 year ago
Reply to  B Snyder

This is the article you’re referring to — and the quote is from Bill Bernstein:

https://humbledollar.com/2017/10/enough-already/

Marjorie Kondrack
1 year ago

Jonathan, as usual you “knocked it out of the ballpark.” Thanks for sharing your knowledge and experience.

Andrew Forsythe
1 year ago

Jonathan, thank you for this. It’s wonderful when the “lazy” way can also be the best way.

Hats off to those with the skill, energy, and patience to own and maintain investment real estate. I learned a long time ago—the hard way—that I’m not one of them.

There’s an old saying: “A house is always hungry”. It’s all I can do to feed our one home.

SanLouisKid
1 year ago

Andrew, I think the same thing! I would never set foot on a baseball field to play in a professional game and likewise do the same with investing. Recognizing my own limitations has been one of the most profitable insights I’ve had.

Marjorie Kondrack
1 year ago

Andrew…Clint Eastwood did have some memorable catchphrases…how about “Go ahead, make my Day” from Sudden Impact (1983)

Andrew Forsythe
1 year ago

Marjorie, another classic there!

CurlyDave
1 year ago

As much as I like the advantages of stocks you list, I think you have missed one of the great advantages of brick and mortar real estate. Sweat Equity: No matter how much I may want to, I can not add untaxed income to stock investments through my own labor. DW and I are both very handy people who enjoy working together to build our future. We never engaged in house flipping, which is fraught with many dangers, but have invested in “unloved” houses that we repaired, painted, landscaped and rented out. The work we put in together was both a great bonding experience and represented an untaxed contribution to our retirement portfolio.

We are both long retired — our stocks and bonds have done very well, but so has our real estate, which has even more tax advantages than stocks.

Certainly not for everyone, but we have about equal amounts of each asset. When we retired, the RE moved to our new location through the tax-deferred magic of 1031 exchanges. Of course there is work involved, but many of the articles I read on retirement extol the value of part-time work in retirement. The job title of “landlord” has a lot more class and appeal than “Walmart greeter”.

SanLouisKid
1 year ago
Reply to  CurlyDave

“The job title of “landlord” has a lot more class and appeal than “Walmart greeter”.”

Thanks for my “laugh out loud” moment of the day!

Edmund Marsh
1 year ago

Great article. Coming from a background of no experience with the market, being told #4 is what made it “click” for me.

William Perry
1 year ago

The article line you wrote though a large stash of canned goods might come in handy transported me back 50 years to my parents garage and the six month supply of can goods my mom rotated to keep the just in case supplies usable. Like many of the baby boomer generation my parent’s expectations were the product of the great depression and WWII.

I am fortunate for the abundance I have experienced during my lifetime but I am concerned that we do have much bigger problems to worry about which strangely makes occasional market unpleasantness easier for me to ignore.

David Shapiro
1 year ago

On #5, if you are married and live in a community property state, the basis of all the equities you and your spouse own as community property will be stepped up when one spouse dies.

Gary Cahn
1 year ago

Thank you for another outstanding column, Jonathan. Regarding your number 7, I know you know this but others may not. If you buy Vanguard’s Total Stock Mkt Index ETF (VTI) it only costs you 30 cents per $1000 invested rather than $1. Saving 70 cents per year might not seem like much, but assume you invest $100,000 and let it sit for 30 years. Assume the stock market returns 10% per year before expenses. If you invest in a retirement account and pay $1/year in expenses you’ll end up with $1,697,973 in your account. If you pay 30 cents per year, you’ll end up with about $32,000 more or to be precise $1,730,720.

You have pointed this out in dozens of your columns: When compounded over 30 years even small differences in expense ratios can add up to a lot of money.

Randy Starks
1 year ago

For retirement portfolio allocations I use (120 – my age) and a modified three bucket retirement strategy. RMDs go to the taxable account for whatever during the year. Its invested in BIL, DRLL and a money market fund.
https://money.usnews.com/money/retirement/401ks/articles/how-to-use-the-retirement-bucket-strategy

Scott Gibson
1 year ago

Spot on for someone planning long term but I think many readers should be more conservative to guard against sequence of return risk. Possibly waiting decades for a large stock allocation to rebound and suboptimizing the healthy early years of retirement is not for me.

Boomerst3
1 year ago
Reply to  Scott Gibson

95% of the time the stock market is positive over a decade

Ormode
1 year ago

If you invest in more conservative stocks, 2022 was not too bad. Owning blue-chip dividend paying stocks, I was actually up a little. Unfortunately, the first three months of 2023 were not as good, but I’m still up on a rolling 2-year basis, even though I take some income for spending.
The most important thing is to continue to invest even if you are retired. Even with a few losing years and withdrawals for spending, my portfolio has increased 50-60% since I retired 8 years ago. Saving and investing are powerful tools once you reach a decent level.

Last edited 1 year ago by Ormode
Jim Kerr
1 year ago

Great reminders of the power of equity. I’m going to print this out and pin it above my desk.

Chazooo
1 year ago

Plain talk, common sense, love it!

Rick Connor
1 year ago

Thanks for the common-sense wisdom. I especially like #4 and the link to the ‘logical bet” article. Re-reading that article, and the opening joke, reminded me of a former co-worker who bought gold bars “just in case”. I was never sure what he was hedging against. It is so much easier to get started in low-cos, diversified investing these days.

betsy larey
1 year ago

Here’s my question. I have 90% in stocks, the rest in cash. My advisory group has lagged the S and P 500 by 4% over 10 years. I would like to end my relationship with them and put it in the S and P, but my gains by selling would be huge. Any advice for me? Thanks if you can weigh in.
betsy larey

Jonathan Clements
Admin
1 year ago
Reply to  betsy larey

Unfortunately, there’s no easy fix. You might start by taking over the account and realizing any unrealized losses. You might also consider using the lowest-basis stocks for charitable contributions. That’s the low-hanging fruit. From there, I’d decide whether there are any positions you’re willing to hold until death to get the step-up in cost basis. What to do with the rest? I’d consider setting up a multi-year plan to ease out of the remaining positions while minimizing the tax bill. Depending on your income level, you might be able to take advantage of the 0% capital-gains tax rate.

https://humbledollar.com/money-guide/income-vs-capital-gains/

Stacey Miller
1 year ago

Plenty of our tax clients’ “positive cash flow” Schedule E’s have tempted me to take the plunge into real estate, but then I roll over in bed on a Saturday morning and think, Einstein was right about the magic of compound interest. Today I’ll get to walk, read, & tidy the house, all while making money in the background. It’s April 1–I won’t be chasing rent payments today or unclogging a tenant’s toilet.

Your list was perfect, especially the choke a horse transactional fees!

Last edited 1 year ago by Stacey Miller
AmeliaRose
1 year ago

Thank you. I’m going to bookmark this article so I can refer to it when friends ask why I invest in mutual funds instead of various speculative real estate ventures they’ve heard of. 😄

Boomerst3
1 year ago
Reply to  AmeliaRose

Try ETFs. They are more tax efficient

Michael l Berard
1 year ago

Great article, Jonathon! The lack of liquidity for real estate is a killer for me. I recently sold a house that was held in a trust, the grantor is my late father, the beneficiary is sister, and, lucky me, I am the volunteer trustee. Even though I had a buyer approach me, before I needed to hire a real estate agent, it was still a very time consuming, aggravating process to sell, taking over 8 weeks, and many email messages, phone calls, printing, scanning, mailing documents, etc. The house was once owned by my grandparents, and I needed to find out their exact dates of death by locating their death certificates, my grandmother passed in 1996, her husband died in 1958…….! enough said.

On the other hand, when we recently needed some emergency repairs on our 2 year old home, ( no additional comment), I was able to transfer the 60 grand required in my T.Rowe Price account to my checking, in 3 minutes and 34 seconds, I was already logged on, etc. For free, save the electricity powering the laptop.

So, better liquidity, better long term returns, cheaper annual costs, much greater diversity, no aggravation and more, for stocks and investment grade bonds vs, real estate. And, as you stated, for those whom love real estate, REITS certainly qualify.

Now, if only I could get my wife to agree to sell our residence….! Well, I guess one house is needed, darn it.( just kidding, honey, my dear bride) I do love the home we had built, honest.

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