At the Money: Here's Why Stocks Are Your Best Bet

Episode Summary

Executive Summary: Barry Ritholtz and WisdomTree CIO Jeremy Schwartz discuss why diversified equities have historically delivered strong long-term, inflation-adjusted returns, while warning that volatility and prolonged losses can test investors. They advocate broad, low-cost market exposure and staying invested—often adding during downturns—especially for investors with long horizons. Gold can hedge inflation, but has historically accumulated wealth less effectively than stocks.

Main Topics: Stocks’ long-term real returns and inflation protection: Schwartz cites historical data showing stocks have produced substantial returns above inflation and argues that companies’ revenues and profits can rise with prices, making equities an effective long-term inflation hedge. Investment horizon and periods of loss: The speakers distinguish short-term risk from long-term outcomes. Stocks can lose purchasing power for extended periods, so investors should consider horizons of at least seven to ten years, and ideally longer. Diversification and low-cost market exposure: Schwartz recommends owning a broad market portfolio rather than trying to select individual winners. Diversification allows successful companies to become larger parts of the market over time, and low-cost access is now more available. Behavior during bear markets: Investors are encouraged to resist panic selling during downturns and consider adding to allocations when prices fall. The speakers emphasize the potential advantage of maintaining a long horizon, especially for younger investors. Stocks compared with cash, bonds, and gold: The discussion contrasts equities’ historical real returns with cash, inflation-protected bonds, and gold. Gold has broadly kept pace with inflation but has delivered much lower long-term growth than stocks. Risk, valuations, and uncertainty: Geopolitical events, inflation, central-bank policy, and market drawdowns create volatility, but the speakers describe risk as the reason stocks offer a premium over safer assets. They assess valuations in relation to inflation-protected bond yields. Quantum-computing promo: The program’s opening and closing include a brief promotion about Q Day and the risk that future quantum computers could decrypt data being harvested today; it is separate from the main investment discussion.

Key Arguments: Over long historical periods, equities have been the strongest of the discussed asset classes for building wealth after inflation; the guest cites approximately 6.5%–7% annual real returns in Siegel’s historical data. A long horizon improves the historical odds of stocks outperforming cash, though it does not eliminate risk: the guest notes a prolonged period of negative real stock returns and an even longer one for bonds. Broad, diversified, low-cost exposure is preferable to relying on individual stock selection because market portfolios include changing winners and reduce the risk of holding long-term losing stocks. During market declines, panic selling can undermine long-term outcomes; investors with decades ahead may benefit from continuing to invest or adding to equities when prices fall. Gold has historically preserved purchasing power but generated less than 1% annual real return over the cited 200-year period, compared with much higher real returns from stocks. Risk-free cash yields and equity valuations should be compared with inflation-adjusted bond yields and expected earnings returns; the guest argues the equity premium remains broadly consistent with its historical level.

Data Points: Historical annual real return for stocks: Approximately 6.5%–7% - Schwartz describes Siegel’s long-run data across stocks and other assets as showing this return above inflation. Longest cited period of stocks losing purchasing power: 17 years - The guest refers to an extended inflation-adjusted loss period, associated in the conversation with 1966–1982. Longest cited period of bonds with negative real returns: 35 years - Schwartz contrasts bonds’ prolonged real-return weakness with the cited stock loss period. Stocks outperforming cash by holding period: About two-thirds at 1 year; 75% at 5 years; about 85% at 10 years; 99% at 20 years - Historical probabilities cited by Schwartz to illustrate how the chance of stocks beating T-bills rises over longer periods. Gold’s annual real return: Less than 1% - Schwartz says gold kept pace with inflation over the cited 200-year data but delivered less than 1% per year after inflation. Current cash yield mentioned: About 5% - The guest refers to the prevailing cash rate during the discussion and cautions against judging stocks solely against short-term yields. 10-year TIPS yield mentioned: Around 2% - Used as an inflation-adjusted bond benchmark in the guest’s comparison of stocks and bonds. Forward price-to-earnings ratio and earnings yield cited: P/E of about 18–19; earnings yield of about 5%–6% - Schwartz’s approximate valuation figures for stocks in the discussion. Historical equity premium cited: About 3% - The guest compares the expected stock return premium over inflation-protected bonds with Siegel’s long-run estimate.

Pivotal Quotes: "We do believe very much in diversification, owning the full market." — Jeremy Schwartz: His central recommendation for investors seeking long-term equity returns. "They go on sale, and you want to take the opportunity to buy." — Jeremy Schwartz: A metaphor for maintaining perspective and considering investment during market downturns. "If it was easy, everybody would be rich." — Barry Ritholtz: The closing reminder that investors must tolerate uncomfortable volatility to pursue long-term equity returns.

Implications: Long-term investors should consider diversified, low-cost equity exposure suited to their risk tolerance and time horizon, and avoid letting short-term fear dictate decisions. Historical probabilities are not guarantees; investors should maintain appropriate diversification and liquidity.