By Travis J. McShane, CFP®, CFA®

40 Years and Counting…

Since Eclectic’s inception in 1984, investing in stocks has been a pillar of most (if not all) financial plans we put together for our clients with long term goals. We find it helpful to periodically step back and review the assumptions underpinning our long-term investment philosophy which is what follows in this article.

While this analysis focuses on broad-based index returns, our investment committee continues to meet frequently throughout the year to conduct the ongoing research on the specific investments we recommend for client portfolios. Our due diligence process incorporates many factors such as assessing a manager’s track record, consistency of performance, philosophy of investing, fees as well as many other metrics. If you have questions about our due diligence process or investment philosophy, please do not hesitate to reach out and we’d be happy to discuss.

Stocks for the Long Run

For long-term investors, stocks—shares in publicly traded companies—have historically been a powerful tool for wealth accumulation. Their appeal lies in their potential for significant growth, as evidenced by nearly a century of historical data.

However, investing in stocks comes with a key caveat: short-term volatility. Price fluctuations, which can occur unpredictably, make stocks unsuitable for money that will be needed in the near term. For those planning to invest, a holding period of at least three to five years is strongly recommended to mitigate the risks of these fluctuations.

A comprehensive analysis of historical returns, spanning the period from 1926 to 2023 and based on the SBBI (Stocks, Bonds, Bills, and Inflation) dataset, sheds light on the relationship between investment duration and risk. This data reveals striking trends:

Over the entire 98-year period, the average annual return for stocks was 10.3%. In comparison, corporate bonds delivered an average annual return of 5.7%, and Treasury bills returned 3.3%. Meanwhile, inflation, as measured by the Consumer Price Index, averaged 2.9% annually. The ability of stocks to consistently outpace inflation over long periods highlights their appeal as a “reasonably safe” investment for patient investors.

The Inflation-Adjusted Advantage of Stocks

Inflation erodes purchasing power, which means that investments in vehicles like money market accounts, while considered safer, may fail to grow sufficiently. Or if we can consider fixed income instruments like corporate bonds which outpaced inflation only 67% of the time over 20-year periods. In contrast, stocks outperformed inflation 100% of the time over the same duration.

This makes a compelling case for stocks as the superior choice for long-term financial goals. Despite their reputation for risk, their historical ability to maintain purchasing power—and even grow wealth in real terms—positions them as less risky than more conservative options like bonds or cash when evaluated against the ultimate investment goal: ensuring sufficient assets when they’re needed.

Risk: A Matter of Perspective

A key insight for investors is redefining risk. Rather than focusing solely on volatility or the possibility of short-term losses, risk should be viewed as the likelihood of not having the money needed at a specific time. By this definition, the stock market is often less risky for long-term goals than cash or bonds, which carry the risk of inadequate growth.

In conclusion, while no investment is without risk, the historical evidence underscores that stocks are a powerful and relatively safe tool for long-term wealth building. Investors who can withstand short-term volatility are more likely to achieve their financial goals and protect their wealth against inflation.

If this has prompted any questions about your own portfolio and long-term goals, please do not hesitate to reach out to us here to start a conversation. We are happy to meet by phone or in-person to see how we can help.