- Contrary to popular belief, equities are not necessarily riskier than “safe” assets like US Treasuries.
- While bonds may seem safe, they can produce awful returns for investors over both short and long-term periods.
- Equities have the potential to weather inflationary storms better than bonds, as businesses can adapt and evolve.
- Over the long run, equity markets consistently outperform cash and bonds, making them a better bet for long-term investors.
- Stocks may seem volatile in the short term, but their annual standard deviation over 20-year intervals is lower than T-Bills.
- Although stocks can be risky, they can also offer higher returns and lower risk compared to bonds over extended periods of time.
Many financial experts believe that investing in stocks is risky due to their volatility and the risk of permanent principal impairment. However, equities are not necessarily riskier than assets like US Treasuries, which are considered “safe.” While US Treasuries offer a low-risk investment with virtually zero default risk, they are not immune to changes in interest rates and inflation.
For example, if interest rates suddenly skyrocketed to 10%, the value of a “safe” Treasury bond would be cut in half. Moreover, considering inflation rates of approximately 6% or 8.3%, lending to the government at a 2.46% interest rate would result in negative real returns. In comparison, keeping money in cash or under a mattress would result in a depreciating value of 6% a year.
While stocks are more volatile than bonds, this does not mean that bonds are always a safer investment. Companies can be affected by inflation and other macro events, but they have the ability to adapt and evolve. Equities, as assets, are better equipped to weather inflationary storms as businesses can raise prices, cut costs, or sell off real estate. In contrast, bonds are locked-in contracts that cannot adjust to changing circumstances.
Long-term returns for equities are higher than other asset classes, such as cash and bonds. Although stocks may experience short-term volatility, they have proven to be consistent wealth generators over the long term. Stocks have outperformed bonds by a significant margin since 1801.
While the annual standard deviation of US stock returns is higher than T-Bills, the standard deviation over 20-year intervals is actually lower than T-Bills. This is despite stocks having a higher compound annual growth rate (CAGR) compared to T-Bills. This demonstrates that over extended periods of time, stocks may be both higher-returning and less risky than bonds.
In conclusion, while stocks may seem risky in the short term, they can offer higher returns and lower risk compared to bonds over the long run. Investing in stocks is a viable option for long-term investors looking to generate wealth.