Stocks For the Long Term
Stocks around the world have rallied since the end of the third quarter of 2022, but some investors remain concerned about the market outlook. It can be hard not to worry as inflation, rising interest rates and geopolitical conflicts make headlines. Why do we at Encasa continue to believe that owning stocks makes sense for long-term investors?
The short answer is that equities have consistently delivered higher returns than bonds and cash over time horizons longer than 10 years, and often over time horizons shorter than that. The chart below shows the growth of $100 invested in Canadian cash, bonds and stocks over 20 years:
The dark blue line showing stock returns rises more steeply, but with more zigs and zags, than the lines for bonds or cash. When stocks are on an upward zig, it’s easy to remember their role in the portfolio: those stronger long-term returns. However, when stock prices are zagging downward, it can be easy to forget why they are still worth owning as part of a diversified portfolio.
2022 has felt that way at times. However, it’s important to note that despite the recent volatility, stocks remain well above their pre-pandemic highs, and above where they were as recently as the middle of 2021.
More importantly, looking forward, stocks still offer the prospect of higher long-term returns than bonds or cash.
This is grounded in the fact that stocks represent ownership in operating businesses. That ownership allows stockholders – including Encasa’s investors – to benefit from the growth of corporate profits over time. Profits don’t grow every quarter or every year, but over time, well-run companies tend to grow their sales and profits, and this translates to increased value for shareholders. Below is a chart of corporate profits in Canada from 1961 to 2022:
Over 60 years, corporate profits have grown by an average of 7% per year. There have been rocky periods lasting several years, but those have tended to be followed by stronger periods, leading the overall rate of long-term growth to be remarkably consistent.
However, because stock prices are tied to expectations of future growth, stocks can fluctuate in the short run. Benjamin Graham, Warren Buffett’s teacher and mentor, famously summed this up by saying that “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” In the short term, the stock market can rise and fall with people’s hopes and fears, but over longer time periods, share prices tend towards companies’ intrinsic value, and reflect the growth in that value.
Keeping this insight in mind has helped many successful equity investors hold on to their stocks through periods of volatility, to ultimately earn higher returns. At Encasa, we believe that investors who hold on to the stocks in their diversified portfolios will do well in the long term, as stocks’ return potential complements bonds’ income generation and less volatile returns. Your advisor is available to review and help to rebalance your organization’s portfolio to ensure that your investments are aligned with your goals, time horizon and liquidity needs, and that your portfolio makes the best possible use of both stocks and bonds.
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Published: December 2022