There may be an uncomfortable fact each investor should confront: your capital is rarely really secure. The dual threats to long-term wealth are inflation and inventory market crashes. Preserving and rising capital requires balancing these two main dangers.
The Million Greenback Query
Think about receiving $1 million at this time, together with the accountability to safeguard and develop it over the following decade. Your major objective: protect its actual worth — and ideally enhance it. As a cautious steward, how would you allocate this capital?
At first look, the reply appears easy: preserve it secure, maybe in a financial savings account. However on nearer inspection, the selection is way from easy. Historical past exhibits that even essentially the most secure-seeming choices can carry hidden dangers.
Capital at Danger, At all times
To grasp this, let’s flip to historical past. Utilizing US monetary information from January 1900 to December 2024, we discover that inflation averaged 3.0% per 12 months.[1] This implies hiding money beneath the mattress would have been disastrous: over a century, one greenback eroded to lower than 4 cents — a >96% loss in buying energy. Inflation will eat it slowly and silently.
Put it in a financial savings account? That provides you curiosity and likewise feels safer. Over the previous century, financial savings accounts in international locations like america and different western international locations have on common stored tempo with inflation. The typical short-term saving price, proxied by short-term US T-bills, averaged 3.0% per 12 months.
Averages masks vital losses, nevertheless. Within the Forties and early Nineteen Fifties, throughout a interval of economic repression, rates of interest had been held artificially low whereas costs crept larger. This was finished to convey down the debt of the governments that had been closely indebted after World Conflict II. Savers witnessed an actual loss in buying energy of greater than 40%.
Exhibit 1 serves as a wake-up name to savers. It exhibits the peak-to-bottom actual return of US T-bills. It has a most lookback window of 10 years (in any other case restoration could be even slower). It is a image which is counterintuitive. Your financial savings should not secure when you’ve got a 10-year horizon and proper for inflation.
Exhibit 1. Actual Drawdowns US T-Payments
Sources: McQuarrie (2024) and Robeco
As of 2025, a brand new period of economic repression seems to be underway. The inflation spike of 2022, mixed with rates of interest lagging behind, brought on an actual loss in worth of practically 20%. Over time, this unfavorable actual price has compounded. Savers are nonetheless down about 10% relative to 2010 ranges, and with actual rates of interest close to zero in 2025, catching up will likely be troublesome.
The Phantasm of Security
These episodes underscore a elementary fact: even belongings that really feel secure — like financial savings accounts — can expose traders to actual, lasting losses. That brings us to a broader level: capital is at all times in danger. Whether or not you select to save lots of or make investments, you’re having a bet. Inflation and market volatility are ever-present forces.
Over longer horizons, the road between saving and investing begins to blur. What feels secure within the quick time period might fail to protect worth in the long run.
Authorities Bonds: Safer—However Protected Sufficient?
For a lot of traders, the following step past saving is authorities bonds. They sometimes supply about 1% extra yield than a financial savings account and are sometimes considered as a safer different to equities. However secure from what?
Bond traders have confronted difficult durations since 1900. After World Conflict I, a postwar financial increase led to rising inflation, which eroded the buying energy of presidency bonds issued throughout the struggle. These so-called Liberty Bonds got here with low fastened rates of interest, which rapidly turned unattractive within the new inflationary atmosphere. The Federal Reserve responded by elevating charges, and bond costs fell sharply, amplifying losses throughout the recession and deflation that adopted within the early Nineteen Twenties.
An analogous sample adopted World Conflict II: artificially low rates of interest and a chronic bond bear market. The expertise of the Nineteen Seventies is much more acquainted. Throughout that “bond winter,” bondholders misplaced practically 50% in actual phrases. That’s not simply volatility, that’s wealth destruction. Keep in mind: it takes a 100% achieve to get better from a 50% loss.
As of 2025, traders are as soon as once more in a “bond winter,” going through a cumulative actual lack of round 30%, pushed by the excessive inflation of the early 2020s and the next rise in bond yields.
Exhibit 2. Actual Drawdowns US Bonds
Sources: McQuarrie (2024) and Robeco
Shares: Lengthy-Time period Acquire, Lengthy-Time period Ache
An investor is at all times both at an all-time excessive or in a drawdown. Most inventory market traders are conscious of this. Shares can actually disappoint in each the short-term and the long-run. The Nice Despair worn out practically -80% of actual wealth invested within the US inventory market. Even after a powerful restoration, it took a few years, even many years, for many traders to completely heal. Not each dip is adopted by a swift restoration. Inflation, usually missed, can additional erode actual returns, even when inventory markets go up in nominal phrases.
Exhibit 3 exhibits that historical past is stuffed with market corrections of -20% or extra. The twenty first century alone had three drawdowns of greater than -30% in actual phrases. These big and frequent losses are a characteristic of inventory markets. As a result of losses are inclined to happen all of a sudden, most traders are nicely conscious of the short-term dangers.
Exhibit 3. Actual Drawdowns US Inventory Market
Sources: McQuarrie (2024) and Robeco
Over the long-term equities ship returns larger than bonds. But over multi-decade horizons, equities can nonetheless disappoint. Latest analysis by Edward McQuarrie means that even within the nineteenth century, shares didn’t constantly outperform bonds, difficult the concept that equities are at all times the most secure long-term funding.[2]
Evaluating Asset Courses
We study actual losses — the decline in buying energy — throughout 4 key asset lessons: financial savings accounts, authorities bonds, gold, and equities. We take a look at each short-term (one-year) and long-term (10-year) danger utilizing the conditional worth in danger (CVar) — a measure of common losses within the worst durations — also referred to as the primary decrease partial second (LPM1). This measures the anticipated loss within the worst durations, particularly these beneath the inflation price.
Financial savings accounts, whereas usually seen as secure, can quietly erode wealth over time. The typical actual loss trying again 10 years (CVar) was -17%. Over shorter durations, the ache is much less: a typical lack of -2%, with a most one-year drawdown of -9%. This highlights a key paradox: financial savings are comparatively secure within the quick run, however are removed from safe over longer horizons.
Bonds provided considerably higher long-term efficiency, however with deeper short-term drawdowns. Their worst 10-year loss was -49%, barely worse than financial savings, although the common long-term loss was smaller at -10%. Over one-year durations, losses ranged from -4% anticipated to -25% max.
Gold, usually considered as a secure haven, is risky in each the quick and long term. It carried out particularly nicely within the Nineteen Seventies and extra not too long ago outpaced bonds within the inflationary 2020s. But, gold stays dangerous. Its worst one-year and 10-year actual losses had been -44% and -68%, respectively, with excessive common drawdowns as nicely, even larger than shares. Regardless of this, it might probably nonetheless function a helpful diversifier — notably when mixed with regular shares.[3]
Equities ship the best long-term returns, but additionally the best drawdowns. The typical loss was -15%, and even in a single unhealthy 12 months, the anticipated actual drawdown was -7%, with a most of -62%. Lengthy-term traders are rewarded, however provided that they’ll endure extreme interim declines.
Exhibit 4 —Danger and Return of Asset Courses
Sources: McQuarrie (2024) and Robeco
These long-term numbers are hardly ever proven — and for good purpose. Most empirical analysis focuses on short-term, nominal returns, which provide extra statistical energy however assume traders solely care about month-to-month volatility. When considered by way of an actual, long-term lens, a really totally different image emerges. Money and bonds might seem secure within the quick run, however they carry substantial long-term danger as soon as the main target shifts to inflation and long run potential losses.
The takeaway is easy: in the long term, all investments are dangerous. Even financial savings. What issues most just isn’t whether or not you face danger, however the way you handle this danger.
Exhibit 5 — Abstract Danger Ranges by Asset Class
Regular Shares Provide a Center Manner
You may’t cover from danger. After you have capital, you’re uncovered — whether or not you save or make investments. The excellent news is that danger will be decreased by way of diversification throughout asset lessons: bonds, equities, financial savings, and even gold. This is likely one of the few “free lunches” in finance, decreasing danger with out sacrificing return. But even in a traditional 60/40 portfolio, a lot of the danger nonetheless comes from equities.
There’s a higher manner: cut back inventory market danger by specializing in secure firms, generally referred to as “widow and orphan shares.” These companies are inclined to ship constant returns, very like bonds, however with an necessary benefit: their earnings can develop with inflation.
I’ve studied and written extensively on this funding model in tutorial papers and within the e book Excessive Returns from Low Danger. These low-volatility shares might lag throughout sturdy bull markets, however they have an inclination to carry up higher throughout downturns. Within the quick run, they actually should not as “secure” as bonds or financial savings, however they’re much less dangerous than the broad fairness market. In the long term, they provide strong capital safety, notably in environments characterised by stagflation just like the Nineteen Seventies, when dangerous shares struggled. The drawdowns of regular shares are much less extreme and are usually shorter when investing within the full inventory market which additionally consists of the riskiest shares. Historic deep information for this technique exists, and on this weblog, we current outcomes ranging from 1900. [4]
Traditionally, regular shares have delivered spectacular outcomes: an actual return above 10% CAGR from 1900 to 2025.¹ In fact, this determine advantages from the distinctive historic efficiency of US equities and doesn’t account for taxes or transaction prices. Trying forward, returns are more likely to be decrease. Multiples have expanded, driving down anticipated returns. With US debt/GDP ranges close to post-war highs (corresponding to 1918 and 1945) and fairness valuations close to all-time highs, forward-looking actual returns will doubtless be extra modest. (See weblog: “When the Fairness Premium Fades, Alpha Shines.”)
Nonetheless, the relative efficiency of regular shares stays compelling.
Exhibit 6: Danger and Return of Portfolios
Sources: McQuarrie (2024) and Robeco
Curiously, Exhibit 6 makes a powerful case for each diversification and regular shares. A portfolio totally allotted to regular shares displays related anticipated losses as a standard 60/40 portfolio. But, being totally invested in shares means tail danger which is clear for the reason that most actual losses are larger for regular shares than for the 60/40 combine.
Subsequently, a gentle 60/40 portfolio deserves consideration. This portfolio replaces equities with defensive equities and has decrease draw back danger, corresponding to the ultra-conservative everlasting portfolio which invests 25% in shares, bonds, financial savings and gold, however with meaningfully larger returns.[5]
The numbers converse for themselves: changing (a part of) the fairness portfolio with a defensive fairness technique helps to cut back draw back danger. It’s so efficient that it provides just about related draw back safety because the ‘extremely conservative’ everlasting portfolio.
Nonetheless, no technique totally eliminates drawdowns. At any given time, traders face a mean drawdown of at the very least –3% on a one-year foundation (–2% for financial savings), and –6% over a 10-year horizon (–9% for financial savings). There isn’t any risk-free possibility as soon as your horizon is lengthy and open-ended.
The Regular 60/40 Portfolio provides a compelling mix of inflation safety and inventory market resilience. Whereas already strong, it serves as a powerful start line open to considerate refinements. For example, including 5% to 10% in gold or commodities, as within the Everlasting Portfolio, might additional cut back drawdowns throughout inflationary durations such because the Nineteen Twenties, Nineteen Seventies, and 2020s. Further enhancements — like momentum, or worth indicators — can enhance long-term returns by way of alpha.
The optimum combine in the end is determined by an investor’s danger urge for food and time horizon, making it adaptable to a variety of preferences. However the first-order impact is obvious: inventory market danger is the most important supply of long-term portfolio losses — and it may be decreased with an allocation to bonds. Nevertheless, one other efficient method to decrease danger is by changing a portion of equities with regular shares. This strategy preserves long-term returns whereas additionally permitting for a decrease bond allocation, which helps cut back danger in an inflationary atmosphere.
The Most secure Transfer: Lose Much less
Even the most secure funding will lose worth in some unspecified time in the future. No portfolio is resistant to actual losses. However some portfolios lose much less, and dropping much less offers traders the time and confidence to remain invested.
One key protection is diversification. Placing all of your capital in a financial savings account will increase long-term inflation danger. Placing all the things in equities will increase each short- and long-term drawdowns.
A gradual portfolio — one that features a substantial allocation to low-volatility, conservative equities — provides a compelling mixture of inflation safety, market stability, and long-term return. The info present that such portfolios cut back actual drawdowns considerably in comparison with each an all-equity allocation and a standard 60/40 combine, with out sacrificing long-term efficiency.
Now think about once more being entrusted with $1 million to protect and develop over the following decade. You now acknowledge that it’s not a simple process however a balancing act. As an alternative of 100% saving, historical past suggests the most effective safety comes from diversified investing, together with a significant allocation to regular shares.
Key Takeaways
Over lengthy horizons, no asset is really secure — not even money.
Historic information present regular shares mix resilience with enticing returns.
Diversifying throughout higher — not simply extra — belongings reduces drawdowns.
Pim van Vliet, PhD, is the creator of Excessive Returns from Low Danger: A Exceptional Inventory Market Paradox, with Jan de Koning.
Hyperlink to analysis papers by Pim van Vliet.
References
Baltussen, G., Swinkels, L., & van Vliet, P. (2023a). “Investing in deflation, inflation, and stagflation regimes,” Monetary Analysts Journal, 79(3), 5–32.
Baltussen, G., van Vliet, B., & Van Vliet, P. (2023b). The cross-section of inventory returns earlier than CRSP. Out there at SSRN 3969743.
McQuarrie, E. F. (2024a). Shares for the long term? Typically sure, generally no. Monetary Analysts Journal, 80(1), 12-28.
McQuarrie, E.F. (2024b) Introducing a New Month-to-month Collection of US Authorities Bond Returns 1793–2023. Working Paper 4899187, SSRN
van Vliet, Pim, and Harald Lohre. “The Golden Rule of Investing.” The Journal of Various Investments (2023).
CFA Institute Enterprising Investor. Might 2025. When the Fairness Premium Fades, Alpha Shines. Hyperlink
[1] We use 30-day T-bills (90-day previous to 1926) as proxy for saving accounts, Authorities Bonds, Inventory Market and Conservative Shares. Sources are from MacQuarrie and Robeco.
[2] See 2024 research by Edward McQuarrie, E. F. (2024). Shares for the long term? Typically sure, generally no. Monetary Analysts Journal
[3] See: The Golden Rule of Investing by Pim van Vliet, Harald Lohre :: SSRN. Whereas traders can maintain bodily bullion, gold ETFs supply a extra sensible resolution.
[4] The Conservative System information are used and from 1929 will be downloaded at paradoxinvesting.com/information. Information going again to 1900 is described within the 2023 research ‘The cross-section of inventory returns earlier than CRSP.”
[5] Popularized by Harry Browne in Fail-Protected Investing: Lifelong Monetary Safety, 1981. The Everlasting Portfolio allocates equally to shares, bonds, money, and gold to hedge towards inflation, deflation, recession, and market danger.
