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“The riskiness of an investment is not measured by beta but rather by the probability—the reasoned probability—of that investment causing its owner a loss of purchasing-power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period. And a non-fluctuating asset can be laden with risk.” — Warren Buffett, in his 2011 Berkshire Hathaway shareholder letter.
Diversified stock portfolios, e.g., index funds, have proven to be the best long-term investment available for reducing the real risk Buffett is talking about. Since 1928, U.S. stocks averaged about 9.9% nominal annual returns, translating to roughly 6–7% real returns after inflation. Bonds averaged 4.6%, cash 3.3%, gold 5%, and real estate 4.3%.
The following plots in these posts include a “MAX” function that allowed me to draw traces that locked in the peaks of the S&P 500 curves. Thus, you see thick cyan-colored table tops when the market dips for a while. Very cool. I haven’t seen this done before, but I don’t get around much.
I included P/E and CAPE ratios, which aren’t a core topic in these posts, but they don’t clutter the presentation and some of you will appreciate them. P/E is current market price divided by trailing 12-month earnings, and while not inflation-adjusted, the division removes its effect somewhat. CAPE is Shiller’s P/E that uses the same “P” but adjusts earnings for inflation and uses a trailing 10-year average. It’s a much improved look at the long-term, as shown in these plots.
Nominal S&P 500 1960–2025 Graph
The post-dot-com bubble of the 2000s is sometimes called the “lost decade,” but in real buying power it was actually about 17 years. Worse still, by far, were the three lost decades from 1965 to 1995. I haven’t seen this mentioned anywhere, but again, I don’t get around much.
I included a CPI curve that is useful in interpreting the differences between the nominal S&P 500 curve (lower) and the inflation-adjusted curve (upper). I also lightly shaded the real lost decades.
Investing is about preserving and growing usable wealth, which means what you can purchase, not how many units of the local currency you have. In mid-1922 Germany, the exchange rate for one US dollar was about 320 marks. By November of the next year, it was one US dollar to 4.2 trillion marks.
The goal isn’t numbers—it’s purchasing power—yet gains are usually measured with a nominal ruler. Becoming a millionaire isn’t the flex it used to be, and realizing this is foundational to financial wisdom.
(Graphs are high-resolution and should be viewed full screen. You can download them.)
I experienced all of these “lost decades”. 1965-1995 was highly volatile, with annual returns (all dividends reinvested) of -14.66% to + 37.58%. $100 invested in 1965 and all dividends reinvested each year would have grown to about $1745. However, that is misleading because $100 in 1965 had the equivalent purchasing power of approximately $559 in 1995 due to the cumulative effect of inflation over that 30 year period.
I’ve always taken the published returns with a grain of salt. My financial future was not determined by the stock market. It was determined by my career and investing in my business, and my willingness to save at a rate substantially greater than inflation. A portion of those savings were invested in a variety of ways, including growing and maintaining my business. I don’t have much personal reliable data prior to 1995 (1965 to 1995), but in 1996 my CAGR was 0.00% with a net worth of $10,727! Stock market, business and personal financial disruptions caused this.
For the 30 year period, from 1995 to 2025 my GAGR was 19.16%. There was a lot of volatility. In poor years I put cash into the business and was unable to add to my retirement accounts. My worst year of percent change was -92.1% and the best was 526%. There were eight negative years and 19 positive years. Three years were 0.00% change.
Note: I used AI for stock market returns and inflation numbers.
We use a TIPs bond ladder for low-risk preservation of purchasing power in a liability matching portfolio against future expenses. Stocks are held for long term growth.
Rob, could you expound on this a bit more, please? I don’t know what you mean by “a liability matching portfolio.”
Liability matching is the strategy I use to run my portfolio. The concept is straightforward: you map out your anticipated spending needs across different time horizons, then align those needs with assets that match each timeframe.
For near-term expenses—say anything you’ll need in the next five years—you hold short-term bonds or TIPS. These are stable, liquid, and won’t leave you scrambling if the market tanks right when you need the cash. As you move further out on your spending timeline, you can afford to take on more risk since you’ve got time to ride out volatility. So for expenses 10, 15, or 20+ years out, you match those with progressively more aggressive assets like equities.
What you end up with is an asset allocation that’s actually pretty similar to the three-bucket strategy people talk about—safe money for immediate needs, moderate investments for mid-range goals, and growth-oriented holdings for long-term spending. The difference is you’re building it from your actual spending forecast rather than following some arbitrary bucket framework. It’s a more intentional approach that ties directly to what you’ll actually need and when you’ll need it.