If you ask most people whether stocks are safer than cash, you’ll typically be met with a quizzical look. Especially after a year like 2020, most people imagine that it must be some kind of trick question. “Of course stocks aren’t safer than cash,” they’ll say. With all the ups and downs this past year, stocks probably feel anything but safe. And that feeling is likely to affect their thinking as they begin to prepare financial plans for next year.
As 2020 comes to a close, stock market investors have experienced a wild ride. Someone who held $100,000 in the S&P 500 on January 1 would have seen his account balance fall to $69,600 on March 23 before rising to $114,400 as of this writing. Even if that investor had the intestinal fortitude to ride out the volatility, he most likely experienced several sleepless nights along the way. Conversely, someone who held $100,000 in a money market account on January 1 would have seen no decline in his account balance and probably would have $100,001 today. Sure, the stock market investor made more money in the end…but the person who kept his capital in the money market account slept soundly throughout the period.
“Maybe I didn’t make as much money as I could have,” the money market investor might tell himself. “But at least I played it safe by holding cash. And that safety certainly counts for a lot.”
The money market investor must be justified in making that claim, right? Well, actually, we don’t think so. In fact, we would argue that – contrary to conventional wisdom – for most investors investing in stocks is far safer than investing in a money market fund. And we would go further. Holding cash can be very risky.
The key to our argument is time horizon. The longer the time horizon, the safer it is to own stocks and the riskier it is to own cash. Consider what has happened since Harris Associates opened for business nearly 45 years ago. From 1976 to 2020, the S&P 500 rose from 52 to 7,472 for a total return of 14,350% with dividends reinvested. Over that same period, by contrast, the purchasing power of the U.S. dollar declined 79%. In other words, the money market investor would require $4.75 today to buy what he could have obtained for just $1 in 1976.
When looked at this way, it turns out that stocks no longer appear so risky and that cash no longer appears so safe. But if holding stocks really is safer than holding cash, why doesn’t it feel like that’s true? The answer is that many people confuse stock price volatility with risk – and they forget that stocks aren’t just certificates that wiggle around in price every day but rather are ownership interests in real businesses that tend to grow in value over time.
As gut-wrenching as it may have felt to experience the 33.8% peak-to-trough drop in stocks that occurred last March, it wasn’t as out of the ordinary as you might imagine. The stock market has fallen >25% intra-year on 6 different occasions in the last 45 years on its way to the 144-for-1 increase in value that occurred over the full period. We don’t believe that a short time horizon and stock ownership are compatible with each other because anything can happen to stock prices in the short run – without warning. At the start of 2020, for example, virtually no one expected that a global pandemic was about to occur. If you needed to access money a few weeks or a few months after having invested it, you faced the prospect of selling stocks at a significant loss.
However, the great majority of people can – and should – invest with a longer time horizon. At Oakmark, we advise our clients that they ought to sleep soundly as long as they think in terms of years and decades rather than weeks or months. Since 1950, the worst possible single-year return you would have experienced investing in the S&P 500 was a 39% decline. But the worst possible return you would have experienced over a 10-year time horizon was -1% annualized – and a 6% annualized return over a 20-year time horizon.
We encourage you to consider this history as you prepare your asset allocation plans for 2021. As you do so, keep your focus on how best to increase your purchasing power over your investment lifetime. If you own a diversified portfolio of well-chosen stocks, you can be confident that you are likely to attain not only a far higher return than you would get from cash – but also a far safer one.
The S&P 500 Total Return Index is a float-adjusted, capitalization-weighted index of 500 U.S. large-capitalization stocks representing all major industries. It is a widely recognized index of broad, U.S. equity market performance. Returns reflect the reinvestment of dividends. This index is unmanaged and investors cannot invest directly in this index.
Investing in value stocks presents the risk that value stocks may fall out of favor with investors and underperform growth stocks during given periods.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed-income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers’ research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the portfolio managers and Harris Associates L.P. as of the date written and are subject to change and may change based on market and other conditions and without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.
Certain comments herein are based on current expectations and are considered “forward-looking statements”. These forward looking statements reflect assumptions and analyses made by the portfolio managers and Harris Associates L.P. based on their experience and perception of historical trends, current conditions, expected future developments, and other factors they believe are relevant. Actual future results are subject to a number of investment and other risks and may prove to be different from expectations. Readers are cautioned not to place undue reliance on the forward-looking statements.
Robert F. Bierig
Portfolio Manager and U.S. Investment Analyst