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.