Even after dismal 2022, stocks still best bet to retire rich

Last year was disappointing for investors who own stocks in their retirement accounts, as the S&P 500 index — which tracks the performance of the U.S. stock market — lost 18%.

If you have thought about abandoning stocks, you are not alone. Anytime stocks lose big, a significant proportion of retirement investors move their account holdings into safer investment classes, especially U.S. Treasury bonds, which are nearly default-proof thanks to being backed by the government. However, before you start logging into your pension accounts to rebalance your retirement holdings, consider this:

The worst period in U.S. history for stock investment was the market crash of 1929, followed by the Great Depression. Investors who put money in large-cap stocks (S&P 500) at the beginning of 1929 saw their holdings plummet by 60% by the end of 1932.

However, if they had a 30-year investment horizon — as many retirement savers do — their investment generated an average return of 8% per year by 1958. That corresponds to getting $10 from every $1 invested 30 years prior. It was the worst gain for stocks in the history of this country, and even then, stocks beat Treasuries by more than 3% per year.

The main reason for the superior performance of stocks is that during a sufficiently long investment horizon, any “bad years” will be balanced out by “good years.” Stock investors will benefit from a higher average return on investments that reward higher stock risk.

I recently ran a comprehensive analysis of average investment returns from 1928 until 2022. There has never been a 30-year period when Treasuries outperformed stocks in those 95 years. On average, stocks appreciated by 10.8% per year, while Treasuries generated just 5.9% annually. To put it differently, $10,000 invested in stocks produced, on average, $218,000 30 years later, while the same initial investment in Treasuries would grow to only $56,000. And it would take, on average, more than 20 additional years for investment in Treasuries to get to the same ending values as a 30-year investment in stocks.

Investors gain little protection from lower fluctuation of bond investment even for shorter horizons. Stocks outperformed Treasuries for all 25-year investments and all-but-one 20-year investments since 1928. You would have to go down to 10-year investments to see any significant proportions of instances when Treasury bonds beat stocks (in 13 out of 86 possible 10-year investment horizons). And do not expect to get much help from investment in corporate bonds or real estate, either. Both types of investment offer a relatively small chance of outperforming for horizons above 20 years while providing relatively small annual average returns (4.6% for real estate and 7.7% for corporate bonds for 30-year investment periods).

Yes, stocks give us sleepless nights sometimes. The point is that over long horizons, stock investment is the chief catalyst of wealth. If you invested in them precisely 30 years ago, you saw your holdings fall by 22% in 2002, 37% in 2008, and 18% last year.

Yet, after those 30 years, $10,000 grew by 9.6% per year, leading to the value of $150,000 — more than double the value invested in corporate bonds and more than quadruple the value invested in Treasuries. Even with last year’s loss, average stock returns beat those for Treasuries, corporate bonds and real estate for any investment horizon from 10 to 30 years.

Investing in bonds makes sense. When we get near our retirement ages, conserving value and decreasing the volatility of our retirement accounts is important. But if you still have more than two decades until you clock in for the last time, then life almost seems too short not to take advantage of stocks’ high-earning potential.

Tomas Jandik is a finance professor and holds the Dillard’s Chair in Corporate Finance at the University of Arkansas in Fayetteville. The opinions expressed are those of the author.