Why The Stock Market Is The Best Place To Invest

“The stock market is risky”. “There are better places to put your money”. These are just some of the sayings I have heard over the years from people who were either uncertain about where to place their money or from proponents of other investment alternatives like bonds or precious metals. As with most blanket statements in our world today, there’s a tinge of truth to these quotes, but the devil is in the details. One thing I can assert for you today is that, over an extended period of time and with few recent exceptions, the stock market has been, in the past, and likely will remain in the long run, the single greatest source of wealth creation accessible by anybody with a few bucks at their disposal.

To see this, let’s start by comparing the market to bonds over time. Bonds are an important financial instrument and they have their own class of adherents who swear by them. This cult-like following is well-deserved because unlike stocks, bonds often protect investors when times get bad and in the case of US government-issued bonds, they are so safe as to be considered ‘risk-free’. If you don’t want to lose your money, bonds are perhaps the best bet, but that doesn’t mean they are better than stocks.

Truth be told, anybody can cherry-pick data to give you a scenario where bonds, even government-issued ones, have outperformed stocks. For instance, from 1928 through 1942, the market would have turned $100 into just $111.61, while 3-month T-Bills would have turned that same $100 to $117.85 and 10-year T-Bonds would have turned it into $163.72. However, what matters is that over almost any time period, stocks come out on top. From 1928 through 2018, $100 invested in the market would have turned into $382,850, while the same amount invested in 3-month T-Bills would have turned into just $2,063.40, and while it would have turned into just $7,308.65 if invested in 10-year T-Bonds.

Some of the best analysis I have seen over the years has come courtesy of David Dreman. In his book, Contrarian Investment Strategies: The Psychological Edge, he pointed out that in a simulation of 30 year periods performed between 1946 and 2010, the market would have generated an inflation-adjusted return of 563% compared to 14.1% for T-Bills and 61% for corporate bonds (which tend to generate higher returns than T-Bonds but don’t carry the risk-free moniker). In his analysis, he calculated that between 1946 and 2010, holding stocks over a period of 30 years would give you a 100% chance of beating T-Bills or corporate bonds. Similar percentages just under 100% were calculated for the periods of 1871 through 1945, and 1802 through 1870.

Some of Dreman’s earlier work, through his book Contrarian Investment Strategies: The Next Generation, compared stocks to gold (the go-to precious metal). From 1802 through 1996, the inflation-adjusted return for stocks totaled 7% per annum, compared to 3.4% for corporate bonds and 2.9% for T-Bills. Gold, on the other hand, generated an annualized return of only 0.06%.

There are always different legitimate reasons why investors might choose to put their money in something other than stocks, and that’s alright, but for the long-term investor, there has been no real option in recent years that has been better than stocks. Newer alternatives these days include cryptocurrencies, and since their advent, they have, on the whole, outperformed the market without any doubt. This may continue for some period of time, but it is likely that even they, over the long run, will come in below what the stock market achieves.