Why Stocks Offer the Best Long-Term Returns: Unlocking the Power of the Stock Market

The Historical Evidence

The superiority of stocks over other investments is not just a theory—it’s backed by robust historical data. A study by professors Eugene Fama and Kenneth French, which examined the performance of stocks, bonds, and bills in the United States from 1927 to 2019, found that stocks outperformed both bonds and bills by a significant margin. Over this period, stocks delivered an average annual return of 10.3%, compared to 5.4% for bonds and 3.3% for bills (Source).

This outperformance is not unique to the United States. In a separate study, Credit Suisse analyzed the returns of stocks, bonds, and bills across 23 countries from 1900 to 2020. They discovered that stocks were the best-performing asset class in every country studied, with a real annual return of 5.2% on average, compared to 1.7% for bonds and 0.7% for bills (Credit Suisse Global Investment Returns Yearbook).

Furthermore, data shows that over longer time horizons, the probability of achieving positive returns with stocks increases significantly. According to Jeremy Siegel’s book Stocks for the Long Run, the longer you hold a diversified portfolio of stocks, the lower the risk of negative returns, making stocks an ideal vehicle for long-term wealth accumulation.

The Power of Business Growth and Dividends

So, what drives the long-term outperformance of stocks? At its core, investing in stocks means owning a piece of a business. As these businesses grow, innovate, and generate profits, their value tends to increase over time. This growth potential is the primary reason why stocks have historically delivered higher returns than other investments.

Take, for example, the story of Apple Inc. If you had invested $10,000 in Apple’s IPO in 1980, your investment would be worth over $9 million today (assuming reinvested dividends) (Source). Similarly, a $10,000 investment in Microsoft‘s IPO in 1986 would have grown to more than $34 million (Source). These remarkable returns demonstrate the wealth-building potential of investing in growing businesses over the long term.

In addition to capital appreciation, many stocks also pay dividends, which are regular cash payments made to shareholders. Dividends provide a steady stream of income and can be reinvested to purchase additional shares, further compounding returns over time. According to a study by Hartford Funds, dividends have accounted for approximately 41% of the S&P 500’s total return since 1930 (Source).

To identify companies with strong growth prospects and reliable dividend payments, you can use our Dividend Stock Screener and Growth Stock Screener tools.

The Impact of Inflation and the Importance of Staying Invested

Another critical factor to consider when evaluating long-term investment returns is inflation. Over time, inflation erodes the purchasing power of money, meaning that a dollar today will buy less in the future. Historically, stocks have been one of the best hedges against inflation, as growing businesses can often raise prices to keep pace with rising costs.

One of the most common concerns about stock investing is market volatility. While it’s true that stock prices can fluctuate dramatically in the short term, it’s crucial to maintain a long-term perspective and avoid the temptation to time the market. A study by J.P. Morgan found that an investor who stayed fully invested in the S&P 500 for the 20 years up to 2024 would have earned a 9.9% annualized return. However, if that same investor missed just the 10 best days during that period, their annualized return would have dropped to 5.7% (Source).

As Warren Buffett wisely advises, “The stock market is a device for transferring money from the impatient to the patient.” By staying invested for the long haul and not reacting to short-term market fluctuations, you can harness the full potential of stock market returns.

The Power of Compounding

One of the most powerful aspects of long-term stock investing is the concept of compounding. Compounding occurs when the returns earned on an investment are reinvested to generate additional returns. Over time, this process can lead to exponential growth in wealth.

To illustrate the power of compounding, consider this hypothetical example: If you invest $10,000 in a stock portfolio that generates an average annual return of 10%, your investment would grow to approximately $108,000 after 25 years (assuming no additional contributions). However, if you let that investment compound for another 10 years (35 years total), it would grow to over $281,000. This demonstrates how the effects of compounding become increasingly powerful over longer time horizons.

Starting early and consistently investing over time can significantly enhance the benefits of compounding. Our Financial Freedom Calculator can help you visualize how your investments could grow over time and assist in setting long-term financial goals.

Diversification and Risk Management

While stocks offer superior long-term returns, it’s important to manage risk through diversification. Diversification involves spreading your investments across different sectors, industries, and geographic regions to reduce the impact of any single investment’s poor performance on your overall portfolio.

By building a diversified portfolio, you can mitigate company-specific risks and benefit from the growth of various segments of the economy. Using our Stock Screeners, you can identify investment opportunities across different sectors and industries that align with your investment strategy.

Getting Started with Stock Investing

If you’re ready to harness the power of stocks for your long-term investment goals, getting started is easier than ever. The first step is to open a brokerage account with a reputable online broker. Many brokers now offer commission-free trades and low minimum balance requirements, making it accessible for investors of all levels.

Once you’ve opened an account, it’s essential to do your due diligence before investing in any individual stock. This means researching the company’s financial health, competitive advantage, management quality, and growth prospects. Tools like our Stock Analysis Tool and Value Investing Stock Screener can help you quickly assess these key factors. Additionally, our Intrinsic Value Calculator can help you estimate the fair value of a stock and determine whether it is trading at an attractive price.

Consider adopting strategies such as dollar-cost averaging, where you invest a fixed amount of money at regular intervals regardless of market conditions. This approach can help reduce the impact of market volatility and eliminate the temptation to time the market.

Embracing a Long-Term Mindset

Successful stock investing requires a long-term perspective and the discipline to stick to your investment plan, even during periods of market turbulence. Emotional decision-making can lead to poor investment choices, such as panic selling during market downturns or chasing hot stocks based on hype.

As Benjamin Graham, the father of value investing, noted, “The investor’s chief problem—and even his worst enemy—is likely to be himself.” By maintaining a disciplined approach and focusing on the long-term fundamentals, you can avoid common pitfalls and increase your chances of investment success.

The Bottom Line

In summary, stocks offer the best long-term returns because they represent ownership in businesses with the potential for growth, innovation, and the ability to weather inflationary pressures. While short-term volatility can be unsettling, history has shown that stocks have consistently outperformed other asset classes over the long run.

By diversifying your portfolio, maintaining a long-term perspective, and using the tools and resources available on Stock Investor IQ to make informed investment decisions, you can tap into the wealth-building power of stocks and work towards achieving your financial goals.

Remember, successful stock investing is a marathon, not a sprint. By having patience, discipline, and a well-thought-out strategy, you can harness the potential of the stock market to build lasting wealth and secure your financial future.

Take Action Today with Stock Investor IQ

• Explore Our Stock Screeners: Find investment opportunities that align with your goals.
• Deep Dive with Our Stock Analysis Tool: Evaluate companies thoroughly before investing.
• Calculate Fair Value Using Our Intrinsic Value Calculator: Determine if a stock is undervalued.
• Plan Your Journey with Our Financial Freedom Calculator: Set and track your long-term financial goals.

Embark on your investing journey with confidence, equipped with the knowledge and tools to make informed decisions. Remember, the best time to plant a tree was 20 years ago; the second-best time is now.

Happy investing!