How Can You Not Love Equities?

by: Eric @ SERVO


Equities are simultaneously the most successful wealth enhancement vehicle available and the most universally-hated investment by investors and professionals alike.

Equities have an unmatched track record of generating favorable returns during even the most difficult environments.

Whether you are saving for a secure retirement or need ongoing cash flow, a permanent commitment to a diversified equity portfolio represents your best chance for long-term financial success.

What is it about the global equity markets that constantly draw such ire? When markets are advancing, we're inundated with warnings that prices are "overvalued," implying that a sharp decline will soon occur. When we do experience a setback, which has always been typical of long-term market advancements, investors fear that things can only get worse, or that any recovery will be tepid and insignificant when compared to the decline. All of this angst despite the fact that $1 invested in the S&P 500 in 1926 was worth $5,459 at the end of March (+10.0% per year); $1 invested in the MSCI World Index in 1970 is worth over $63 as of month end (+9.4% per year).

You can excuse self-directed investors who may not have a healthy perspective on the long-term history and resiliency of equity markets or a firm grasp of the sources of risk and return. But what's the excuse for so many equity-loathing financial advisors who should know better? A recent Wall Street Journal article interviewed several pros, all of who seemed to be cheerleaders for portfolio allocations that are excessively larded with low-returning fixed income.

I've heard all the arguments before. I get that investors are naturally risk averse. I understand that an advisory practice built around low-volatility portfolios makes the inevitable corrections and bear markets easier to manage. I know that, if you allow them to, most investors will ignore their long-term financial legacy aspirations if they think it will cause them undue discomfort while they're living. I realize the long-term purchasing power risk that a fixed-income dominated portfolio is exposed to may only manifest many years into the future, while a plunge in equities could occur at any moment. I just don't buy them.

We've seen two brutal bear markets since the turn of the century-first in 2000 and then in 2008. We've seen several "corrections" as well-2010, 2011, 2015 and earlier this year. If this wasn't bad enough, market researchers tell us that equity valuations to start this century were higher than at any point in modern history! And yet, despite all this, sixteen years and three months into the 21st century, equities have continued to be a terrific investment whether you're socking money away for retirement or living off your portfolio with the goal of leaving behind a sizable legacy once you've passed away.

Asset Class

"Balanced Strategy" Weights

January 2000 to March 2016 Annualized Return

US Large Cap stocks (MUTF:DFELX)



US Large Value stocks (MUTF:DFLVX)



US Small Cap stocks (MUTF:DFSCX)



US Small Value stocks (MUTF:DFSVX)



Real Estate stocks (MUTF:DFREX)



Int'l Value stocks (MUTF:DFIVX)



Int'l Small Cap stocks (MUTF:DFISX)



Int'l Small Value stocks (MUTF:DISVX)



Emerging Market stocks (MUTF:DFEMX)



Emerging Market Value stocks (MUTF:DFEVX)



Emerging Market Small Cap stocks (MUTF:DEMSX)



"Equity Balanced Strategy"



Click to enlarge

A look at the table above reveals that every equity asset class has managed at least a +4% annual return since 2000. US large cap stocks and international large value stocks weren't terrific, but they were more than offset by the significant gains on US small and small value stocks, REITs, as well as international small cap, small value and emerging markets value and small cap stocks. A diversified portfolio spread broadly across each of these asset classes ("Equity Balanced Strategy"), rebalanced annually, generated over 8% per year during this stretch.

Those capable of simple math can surmise that a diversified equity portfolio, consistently adhered to and contributed to, did wonders for a future retirement goal. If you started saving in January of 2000 at the rate of $2,000 per month, and increased that annually by the rate of inflation (for a total amount saved of about $473,000), by the end of March you'd have almost a million dollars-$928,482 to be exact. Quite a step on the road to financial freedom.

But retirees would have flourished with a diversified equity portfolio as well-despite the roller coaster of volatility. $1,000,000 invested in the Equity Balanced Strategy on January 1, 2000, tasked with producing $50,000 per year (5%) in withdrawals (adjusted for inflation), would have grown to $1,617,351 by the end of March. The year-end 2015 withdrawal, after 15 years of inflation-based raises, had grown to over $70,000. But because of the impressive appreciation of equities even after withdrawals (and including all the "corrections" and bear markets), the retirement portfolio's effective withdrawal rate had fallen to only 4.3%. Now that's progress.

Clearly, the track record of equities has been nothing short of remarkable in helping investors achieve their most meaningful long-term financial goals, in spite of their regular setbacks. No other investment option that I am aware of is (1) more easily accessible, (2) requires less ongoing involvement besides periodic rebalancing and staying the course, (3) has consistently produced such favorable results and (4) has such favorable tax benefits (long-term gains rates on qualified dividends and sales of shares held longer than 12 months). Said more simply, how can you not love equities?


Past performance is not a guarantee of future results. Mutual fund performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Disclosure: I am/we are long DFLVX, DFSVX, DFIVX, DISVX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.