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

Episode Summary

Executive Summary: This podcast episode explores the case for long-term equity investing, featuring Jeremy Schwartz of Wisdom Tree Asset Management. Schwartz argues that stocks have historically provided the best real returns over long periods (20+ years), effectively hedging against inflation. He advocates for diversification, buying broad market indexes cheaply, and maintaining discipline during bear markets by viewing price drops as buying opportunities. The discussion addresses volatility, the equity risk premium versus bonds, and the importance of a long-term perspective.

Main Topics: Stocks as the Best Long-Term Asset Class (Priority: 5/5): Historical data shows stocks outperform other assets like bonds, gold, and real estate over 20+ year periods, providing ~6.5-7% real returns above inflation. Long-Term Investing Horizon (Priority: 5/5): Defining 'long run' as 7-10 years minimum, with probability of stocks outperforming cash increasing to 99% over 20 years. Diversification and Market Exposure (Priority: 4/5): Emphasizes owning broad market portfolios cheaply via index funds to capture long-term returns and mitigate individual stock risk. Bear Markets and Buying Opportunities (Priority: 4/5): Advises investors to add to equity allocations during bear markets rather than panic selling, viewing price drops as 'sales'. Equity Risk Premium and Valuation (Priority: 3/5): Current equity risk premium (~3%+ vs TIPS) remains in line with historical averages despite elevated absolute valuations. Inflation Hedging Properties of Stocks (Priority: 3/5): Stocks are considered the best inflation hedge because revenues and profits rise with inflation over time. Gold vs. Stocks as Inflation Hedge (Priority: 2/5): Gold has kept pace with inflation but delivered <1% real returns over 200 years vs. 6%+ for stocks.

Key Arguments: Stocks provide 6.5-7% real returns over long periods, outperforming bonds, gold, and real estate. Inflation does not weaken the case for stocks; they are the best inflation hedge over the long term. Diversification through broad market indices reduces risk and captures long-term growth. Bear markets are opportunities to buy at lower prices, not times to sell. For young investors with 30-40 year horizons, market pullbacks should prompt more aggressive equity buying. Current equity risk premium (3%+) vs TIPS is historically reasonable despite elevated valuations. Over 20 years, stocks outperform cash 99% of the time. Geopolitical risks create short-term volatility but are 'noise' over the long run.

Data Points: Historical real return of stocks: 6.5-7% - Above inflation over 200+ years (Siegel data) Longest negative purchasing power period for stocks: 17 years - 1966-1982 Longest negative real return period for bonds: 35 years - Period ending in 1982 Probability stocks beat cash over 1 year: ~66% - Two-thirds of the time Probability stocks beat cash over 5 years: ~75% - Probability stocks beat cash over 10 years: ~85% - Probability stocks beat cash over 20 years: 99% - Almost always Current equity risk premium (stocks vs TIPS): >3% - In line with 200-year historical average (3.5% for bonds, 6.5% for stocks) Gold's 200-year annualized real return: <1% - Kept pace with inflation but minimal real growth

Pivotal Quotes: "Stocks are not just a good hedge for inflation. The best hedge for inflation. Right. If revenue goes up, if profits go up, stock prices are going to go up." — Jeremy Schwartz: Discussing stocks as inflation hedge "When you zoom out, you go from one year to five years, the odds of success for stocks go up to 75%. You zoom out to 10 years, it's like 85%, and 20 is 99% of the time to stock. Just about always." — Jeremy Schwartz: Explaining increasing probability of stock outperformance over longer horizons "These things always are there, they're in the background. But that's one of the things that gives stocks a risk premium, premium returns, because they have risk. If you didn't have risk, you'd just be in T-bills, but then you don't get compensated for that risk that you're taking." — Jeremy Schwartz: On black swan events and risk premium

Implications: Investors should maintain long-term equity exposure despite volatility and geopolitical risks. Buying during bear markets and holding diversified portfolios for 20+ years offers high probability of positive returns. The current equity premium remains attractive relative to bonds, reinforcing the case for stocks.