The one thing we can say based on history, the U.S. economy is nothing if not resilient. There has been consistent growth and change despite all the “bad” news and end of the world threats that kept popping up.
My earliest clients were born about 100 years ago. Back then, commercial flight was a dream, and movies were silent. When these clients were young, they experienced the biggest financial bubble, followed by the Great Depression, economic collapse, deflation and the Dust Bowl. Next came World War II, 80 million deaths worldwide, and the threat of nuclear destruction.
The United States economy has seen it all and come back from the brink every time. It’s seen wars, crises, recessions, depressions, inflation, deflation, burst bubbles, and the never-ending end-of-the-world whispers and screams. And yes, the US has come back better and stronger each time. Despite all the events I mentioned, the American capitalist machine was constantly creating, innovating, and driving the economy forward every step of the way. The US economy is like no other. How anyone can lose faith in that track record is beyond me, and beyond historical experience.
How do we participate in this inevitable, constant long-term growth? The greatest beneficiaries have been owners of companies. The owner of large and small company stocks got paid nearly twice what the bond owner / loaner did. Stocks returned twice that of bonds from 1926 to 2011. "Real" stock returns (after inflation) were 3 times that of real bond returns from 1926 to 2011. After inflation and taxes, stocks returned FOUR TIMES MORE than bonds. Bonds had almost no net return after inflation and taxes. Bond investors tread water through history, and real wealth comes from long-term stock (business) ownership.
Most people misunderstand risk. They think "volatility" is risk. Volatility is a short-term concept that passes with time. It’s nothing but tiny moments of opportunities for anyone focused on the long term. Risk is defined as permanent loss and/or outliving your money. The real "risk" is loss of purchasing power. Some say that stocks are "riskier" than bonds; this is not historically accurate because, for example, bonds are in constant threat of losing to inflation. Stocks aren’t meant for short-term (under 5 years) goals, they are meant for lifetime and multi-generational goals. Remember, retiring in 5 years or less doesn’t count as a short-term goal. The under-5-year rule doesn’t apply because retirement is the start of a new goal — not to outlive your money. When you retire, your retirement income must keep up with inflation for another 2-3 decades. A more concentrated number of stocks offers the best chance to outperform the market…and underperform too. So a balanced, diversified blend is the key to growing wealth over a lifetime. The stock market as an asset class can’t go to zero, one stock can, and do regularly.
Historical stock returns show that the chance of losing money declines over time. Yes, any given year could end in a loss, but string together several decades of returns and you most certainly will be better off in stocks than any other asset class. All you have to do is to stay patient and stick with the plan.
The U.S. free marketplace is self healing. Better companies thrive and prosper, while inferior ones fall by the wayside, with new companies, technology, and innovation always driving new business creation. The U.S. economy is “one of permanent advance punctuated cyclically by temporary decline”. The economy has a consistent upward trend. Remember— “the advance is permanent; the declines are temporary.”
*Source: Benjamin Graham "The Intelligent Investor", Nick Murray "Simple Wealth, Inevitable Wealth"