The Enduring Case for Stocks
Few asset classes have shaped wealth creation as profoundly as stocks. For nearly a century, US large-cap stocks have delivered growth that outpaces inflation, government bonds, and cash.
Few asset classes have shaped wealth creation as profoundly as stocks. For nearly a century, US large-cap stocks have delivered growth that outpaces inflation, government bonds, and cash, though not without turbulence along the way. The data reminds us of a simple but powerful truth: volatility is the price investors pay for long-term compounding.
The Long Journey of $1 Invested
Data from 1926-01-31 to 2025-12-31
Performance Summary (1926-2025)
| CAGR | Volatility | Sharpe | Max Drawdown | MAR |
|---|---|---|---|---|
| 10.46% | 19.67% | 0.53 | -83.41% | 0.13 |
One dollar invested in US large-cap stocks in 1926 grew to approximately $20,000 by 2025. This impressive growth underscores the compounding effect that results from reinvested dividends and capital appreciation. What may seem like a modest annual return, around 10% on average, transforms into exponential wealth when extended over decades.
The chart also reminds us that compounding works best when uninterrupted. Investors who exit the market during crises miss the subsequent recoveries, which often represent a significant portion of long-term returns. The biggest gains in stocks are not evenly distributed: they concentrate in recovery periods when sentiment is most fragile.
In summary: The lesson from this chart is patience. Long-term wealth is built not by timing entry and exit points, but by enduring the inevitable turbulence along the way.
The Reality of Drawdowns
Behind the upward slope of stocks lies a harsher reality: deep and painful drawdowns. The Great Depression wiped out more than 80% of market value, while the global financial crisis erased more than half. More recently, COVID-19 and inflationary shocks triggered double-digit pullbacks.
For investors, drawdowns are more than numbers on a chart; they are emotional tests. The temptation to sell at the bottom is powerful, and many investors fail precisely because they abandon discipline when markets are most turbulent. Yet all historical drawdowns were eventually followed by recovery and new highs.
This chart underscores an important truth: investing in stocks requires not only capital but emotional resilience. Returns are the reward for bearing risk that, at times, feels unbearable.
The Power of Time Horizons
The volatility of annual returns is striking. One-year results range between spectacular gains above 100% and losses exceeding 50%. However, as the horizon lengthens, the range of outcomes narrows. Over twenty-year periods, stocks have consistently delivered positive returns.
This smoothing effect demonstrates the power of temporal diversification. While investors cannot control short-term outcomes, extending the horizon transforms stocks from a gamble into a reliable wealth-building vehicle. This is why pension funds, endowments, and long-term investors emphasize decades rather than months.
The chart illustrates that the greatest risk is not the market itself, but the investor’s time horizon. Those who can remain invested long enough have historically been rewarded.
Understanding Volatility
Volatility is the heartbeat of stock markets. Sometimes it is steady, sometimes it spikes violently, as in the Great Depression, the oil crises of the 1970s or the 2008 crash. And it does not fade with time: over the long run, annual returns have swung by around 20% a year.
For investors, volatility is often confused with risk, but the two are not identical. Volatility describes how much prices fluctuate; risk is the probability of not achieving our financial goals. The chart above shows why the difference matters. In 12-month periods, US stocks lost money about one time in four; in 10-year periods, about one time in twenty; in 20-year periods, never. This is the US record since 1926, and it is not necessarily repeatable in other countries. Volatility does not go away; a longer horizon is what makes it bearable.
Recognizing this distinction helps investors reframe volatility not as a threat but as a feature of the stock market: the toll required to access superior returns.
The Range of Annual Outcomes
The distribution of annual returns makes one thing clear: stocks are unpredictable in the short term. Some years deliver euphoric gains above 40%, while others inflict painful losses of similar magnitude. Yet almost three in four years were positive, and the most common outcomes lie between 10% and 30% (39 of 99 years), which highlights the underlying strength of stocks as an asset class.
This variability explains why headlines often focus on extremes: the “best year since…” or “worst year since…” narratives. But investors who broaden their perspective see a more balanced reality: stocks tend upward over time, even if annual results are noisy.
Ultimately, this chart emphasizes the importance of viewing stocks as a multi-decade commitment rather than a year-by-year bet. The longer the perspective, the less surprising and the more rewarding the results become.
Key Takeaway for Investors
Stocks are not a straight path to wealth; they are a volatile, sometimes punishing journey. But history shows that investors who remain invested, rebalance prudently, and focus on decades rather than months have been consistently rewarded.
The lesson is timeless: volatility is the price we pay to access long-term compounding. For investors seeking to build and preserve wealth, stocks remain an indispensable pillar of any portfolio.