Quantify Stocks for the Long-Run

Tuesday, April 2, 2019 |

One of the most common phrases in investing is “stocks for the long-run”. While I agree with that statement, what exactly does that mean and how do you quantify it? Often that phrase is uttered dogmatically without any sort of proof or numbers behind it, so let’s dig into a bit…

First, here are the long term returns on US Stocks as represented by the S&P 500:

Stock Market Data

Source: Bob Shiller Data, Morningstar Direct, Capital Advisors Ltd. Calculations. Rolling monthly returns.

A few things stick out:

  • Over longer-periods of time (20 and 30 years) the stock market has generated nominal returns of about 9% and real returns of about 6.5%.
  • There has not been a time historically when stocks have had a negative nominal or real rate of return over longer-periods of time (20 and 30 years).
  • Further, the volatility of stock market returns become more stable as time goes on as the volatility (as measured by standard deviation) decreases.
  • There is no free lunch though. The payment for these relatively high (compared to Cash and Bonds), positive, and stable historical long-term returns has been high volatility in the near-term as the worst stock performance over a 1-year period is close to -70%!

The key to quantifying “stocks for the long-run” rests in 3 key factors as noted above. Historically, the longer you have held stocks…

  1. Stocks have historically offered superior returns to Intermediate US Treasuries and Cash.
  2. You increase the chance of a positive return.
  3. Those returns become more stable.

Points 2 and 3 are illustrated best in the chart below:

Long-Run Stock Returns

Source: Bob Shiller Data, Morningstar Direct, Capital Advisors Ltd. Calculations. Rolling monthly returns.

  • Increase the chance of a positive return = the real returns have never dipped below 0%.
  • Those returns become more stable = the real 30-year returns tend to stay in a 4% to 8% band.

Again, the price for this is large volatility in the near-term. We calculated the maximum drawdown of around -80% in stocks (Source: Bob Shiller Data, Morningstar Direct, Capital Advisors Ltd. Calculations. Rolling monthly returns). Further, not all markets have had positive long-term returns so that is something to be considered (e.g. Japan’s stock market is still below their 1989 peak).

However, when we look at the US Stock Market historically stocks for the long-run has been beneficial to investors and the numbers bear this out.


Past performance is not indicative of future results. Investors cannot invest directly in an index. Investing involves risk, including the loss of principal.

S&P 500: The index measures the performance of 500 widely held stocks in the US equity market. Standard and Poor's chooses member companies for the index based on market size, liquidity and industry group representation. It is market capitalization-weighted.

Price data (average monthly close) per Bob Shiller from 1871 to 1928. Price data (month-end close) after 1928 per Morningstar Direct. CAPE, Dividend (Total Return), and CPI (Real Return) per Bob Shiller and calculated by CAL.

REAL = real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation

There are some risks associated with investing in the stock markets: 1) Systematic risk - also known as market risk, this is the potential for the entire market to decline; 2) Unsystematic risk - the risk that any one stock may go down in value, independent of the stock market as a whole. This also incorporates business risk and event risk; and 3) Opportunity risk and liquidity risk.

Standard deviation is a statistical measure of the range of performance in which the total returns of an investment will fall. When an investment has a high standard deviation, the range of performance is very wide, indicating that there is a greater potential for volatility.