Joachim Klement – Stocks in the long run… are still risky (The Best Investment Writing Volume 6)

Episode Summary

Executive Summary: Joachim Clement argues that the common belief that stocks become safe over long horizons is overstated and heavily biased by the unusually favorable history of US and UK markets. Drawing on long-run data from 39 developed countries, he shows that real losses can still occur even over 20-30 years, especially in markets exposed to shocks, weak policy, or instability.

Main Topics: Myth of long-term stock safety (Priority: 5/5): Challenges the cliché that holding equities for decades guarantees profits, emphasizing that long-term outcomes can still be negative in real terms. Selection bias in US and UK market narratives (Priority: 5/5): Explains that investor optimism is distorted because US and UK histories are unusually favorable compared with the global experience. Cross-country evidence on stock market risk (Priority: 5/5): Cites research across 39 developed countries from 1841 to 2019 showing stocks remain risky even over generational time frames. Extreme short-term and long-term losses (Priority: 4/5): Uses historical drawdowns and inflation-adjusted loss probabilities to demonstrate how severe equity risk can be in both the short and long run. Role of shocks, wars, and macro stability (Priority: 4/5): Argues that home-territory wars, hyperinflation, political instability, and weak monetary policy are major determinants of stock market outcomes. US exceptionalism is contingent, not guaranteed (Priority: 5/5): Warns that the US stock market’s strong historical record depended on stable democracy, rule of law, and business-friendly conditions that could erode.

Key Arguments: Long-term stock investing does not eliminate the risk of losing purchasing power; even 30-year horizons can end in real losses. The popular US/UK belief that stocks are safe over 10-30 years is distorted by selection bias from two unusually successful markets. Historical evidence from 39 developed countries shows that the average long-term probability of negative real returns is materially higher than many investors assume. The US and UK had exceptional market histories because they avoided major domestic destruction and benefited from stable institutions and policy. Investors should not treat political stability, sound money, and rule of law as permanent; these conditions can change quickly.

Data Points: Countries studied: 39 developed countries - Research base cited for long-run stock return analysis Historical period analyzed: 1841 to 2019 - Time span covered by the cross-country study Largest monthly real decline in the UK: -26.9% - Historical worst monthly drop mentioned Largest monthly real decline in the United States: -29.5% - Historical worst monthly drop mentioned Largest monthly real decline in Australia: -42.5% - Example of severe equity drawdown outside US/UK Largest monthly real decline in Belgium: -55.9% - Example of severe equity drawdown outside US/UK Largest monthly real decline in Japan: -87.2% - Example of extreme historical equity loss tied to major shocks Largest monthly real decline in Germany: -91.1% - Example of extreme historical equity loss tied to war/hyperinflation Probability of negative real return after 10 years: 21.5% - Average across the 39-country sample Probability of negative real return after 20 years: 15% - Average across the 39-country sample Probability of negative real return after 30 years: 12% - Average across the 39-country sample Probability of negative real return after 30 years (average across 39 countries): 12.1% - Restated average figure in the transcript Probability of negative real return after 30 years in the United States: 1.2% - Shows US exceptionalism versus global average Probability of negative real return after 30 years in the UK: 3% - Shows UK is better than average but still not risk-free

Pivotal Quotes: "Stocks are really risky, even if you hold on to them for a generation." — Joachim Clement: Central thesis of the episode's featured piece "The probability that your stock market investment is going to end up in a loss after inflation remains much higher than many investors think." — Joachim Clement: Explaining why long-term optimism about stocks is overstated "None of these things can and should be taken for granted." — Joachim Clement: Warning that the institutional and macro conditions supporting US market success may not persist

Implications: Listeners should not assume equities are safe over long horizons or that US market history is universal. Portfolio expectations should account for real-loss risk, country-specific shocks, and the fragility of favorable institutions.