Stocks Aren’t Risky (But You Are)

Let’s say you’ve worked hard to build your income and spend less than you earn, and you’re growing your savings with each passing month. Maybe you’re experimenting with new, borderline-uncomfortable levels of frugal living. Perhaps you’ve even started building a side hustle or two to boost those savings even more. Nicely done!

With all those dollars left over, you have a choice to make: where do you put them? If you’re still holding high-interest consumer debt, the answer is pretty easy. But once you’ve emerged into net worth-positive territory, the choices get more complicated.

We want our hard-earned money to grow as much as possible, of course, but we’re also concerned about mitigating downside risk. Putting 100% of our earnings into Powerball tickets might turn out to be a lucrative strategy, but we’d probably prefer something a bit safer – something without a significant chance of leaving us broke.


There are a million places we could put our money. We could hold it in actual paper currency. We could keep it in a cash-equivalent, like a bank account, CD, money market fund, or T-bill. We could invest it in stocks, bonds, real estate, commodities, or our neighbor’s new “network marketing” idea. Or we could even get really fancy and start trading foreign currencies, futures, options, and mortgage-backed securities.

Let’s simplify things by looking at just three basic asset classes. We’ll keep their identities under wraps for now, though I suspect you’ll have a good guess. Finances are ultimately about numbers, after all, and we don’t want our emotions clouding our judgment.

Because our goals are to enjoy safe long-term growth and preserve purchasing power, we’ll look at inflation-adjusted returns over a 20-year period, based on over one hundred years of historical data.

What do we find?


Investment Class A produced the highest average returns by far – with a mean return of 310% over a twenty-year period. If we had gotten lucky and invested at the best time, we’d have over $1,000 for every $100 we put in – a 10x return! Even in the worst-case scenario, our inflation-adjusted balance is still positive, though only up 5%.

Investment Class B generated attractive positive returns, though not to the same level of Class A. The worst-case scenario is concerning: a 35% drop in inflation-adjusted value over the two decades. Standard deviation is much lower, though, meaning our account value didn’t fluctuate as much along the way.

Investment Class C is the worst choice by far from the perspective of average returns. The mean return was a 14% loss. Volatility is low, so we might not lose sleep during the 20-year period, but only 25% of the time did Class C even maintain our original $100 purchasing power – hardly something to get comfortable with.

Which investment class or classes would you choose? More on that in a moment.


Daniel and I recently spent a weekend hanging out with one of my good friends. She had just taken a long sabbatical between jobs and was thrilled that we were also taking some time off to travel, explore, and get away from full-time work.

At some point, the conversation turned to finances.

“Are you planning on working while you travel to support yourselves?” our friend inquired.

“Not really. We might take a few side gigs here and there, but we’re mostly living on savings.”

“Where do you keep your money? A savings account?”

“No, I’m about 80 or 90 percent in stocks.”

“Really???” she asked, apparently astounded.

“Yeah, of course!” I laughed, perhaps being a bit too cavalier.

“Wow. My dad says he won’t touch the stock market anymore – that it’s way too risky and impossible to make money.”

I left the conversation at that, but I was tempted to offer a couple thoughts in reply:

First of all, one’s dad should probably not be trusted blindly with regard to one of the most important and impactful financial decisions an adult can make. Money plays a huge role in our lives from beginning to end; it’s worth taking a couple hours to study and form your own perspectives.

Second, impossible to make money?! The stock market is currently sitting at an all-time high (this was true at the time and is true within about one percentage point as I write this). Literally the only way you could have lost money investing the stock market index is by trying to time the market.

Of course, I understand where my friend and her dad were coming from. Most people don’t have the fortitude to buy and hold for decades. As soon as the market drops big-time (as it often does), they get nervous. They turn on the self- anointed TV “experts” predicting doom and gloom, and they sell, locking in massive losses. When they eventually put their money back in the market, they’ve already missed the recovery. This is probably why Fidelity supposedly found that their best-performing accounts were those of people who forgot they had money invested there. If you think you can do better, try your hand at this fun market timing simulator.

Or, perhaps the humdrum S&P 500 index just isn’t exciting enough. Surely, many people think, they can do better by investing based on an in-depth reading of the business section every day – or maybe a savvy friend’s latest stock tip. Instead of investing in the index, they bank their savings on individual stocks. The average result, sadly, is underperformance of the index. Some will fare much worse, having banked on the WorldComs and Enrons of the world. Even the professionals struggle, with 86% of actively-managed mutual funds underperforming their indices.


Back to the investment example we started earlier. Let’s work backwards, from C to A.


Investment Class C is cash, assuming an average 1% nominal return on our money. That’s a sweeping assumption, of course (interest rates will fluctuate over time with inflation and other factors), but the takeaway doesn’t change: from a long-term perspective, cash is a terrible investment. Even in an optimistic scenario, we can’t expect it to do much more than maintain its purchasing power. That’s why, contrary to many mainstream sentiments, I consider cash to be the riskiest holding – at least when viewed through a long-term lens.

Investment Class B is bonds. Bonds don’t deliver the best returns, but they’re more attractive than cash in protecting spending power, with much less volatility than Investment Class A.

Investment Class A, as you’ve surely figured, is stocks. The numbers show exactly what we’d expect: high average returns in exchange for a wild ride. You know what astounds me about these figures, though? Since 1871, in not a single twenty-year period has the stock market delivered negative inflation-adjusted returns.

The stock market – risky?

I just can’t accept that an investment class that has delivered positive 20-year returns in 125 consecutive cycles is high-risk. High-volatility, sure. The market has dropped massively time and time again and will continue to do so. But for level-headed long-term investors – those of us with 20, 30, 40, or more years to enjoy the ride and the fortitude to stay in the market when things look bad – year-by-year volatility ≠ risk. Over a long period of time, the stock market is actually our best bet.

Stocks get risky when we think we can consistently outperform averages based on our own hunches.

Stocks get risky when we think we can successfully time our moves in and out – buying low and selling high every time.

Stocks get risky when we watch our account balances every day, finger on the “Sell” button.

Stocks get risky when we take action based on media noise rather than our predefined investment strategies. That $1,096 figure – the best 20-year stock market return in modern history – began in 1980, the year after BusinessWeek published its now-infamous “The Death of Equities” cover story.

The risk isn’t really in the stock market. It’s in us.


Addendum: It’s easy to write all this stuff when the market is soaring to new highs, isn’t it? The moment of truth is when the market drops. I’d encourage you to revisit these sentiments when stocks are down 20%, 30%, or more. I’ll surely be doing the same.

Notes and C.Y.A. Disclaimer: All stock, bond, and CPI data referenced here are illustrative, sourced from the excellent Crowdsourced FIRE Simulator at This post represents my opinions and is for entertainment purposes only. The above examples are oversimplifications and do not account for individual life circumstances and investment criteria. I am not a financial advisor, just a guy with a laptop and an internet connection. For professional financial advice, consult a professional.


  1. I am still mostly in cash because of the bull market we have been in for the past 8 years now. Your analysis is thoughtprovoking, but I am still nervous to make the jump into stocks.

    • We’ve been in a bull market for a long time, that’s for sure. I would have the same angst about putting money into the market right now, but I’ve also felt that way for years now — as the market has continued to climb up and up. Market timing is a gamble, so I’ve usually tried to just suck it up and continue buying, even when valuations felt high. Thanks for commenting.

      • Matt, I love this post. Congrats on getting on Rockstar Finance! That’s how I found your site and I’m glad I did.

        The vast majority of us have no choice but to take on risk to meet our retirement/ financial independence goals. I think the first thing everyone needs to do when evaluating their risk tolerance is determining their need to take risk. Doing so will help people wake up to the idea that just putting money in a savings account (especially with historic lows rates) isn’t going to cut it.

        I wrote more about this here

        Keep up the good work!

        • Glad you found us! The folks at Rockstar Finance have been awfully kind to our little blog here. That’s a great point about evaluating the need to take risk. For me, it was seeing the data about long-term returns that convinced me to accept more volatility than what I was originally comfortable with.

    • My recommendation is to get in and stay in…. invest wisely… As valuations seem really high right now near all time highs and have stagnated for the better of 6 months…. I am still investing weekly only about 5% of my normal amount, 35% is being funneled into my Mortgage debt, and 10% in high interest checking account. I’m interested in see which way the election goes and how that will setup the market trends for the next several years..

      Reducing my personal debt will allow me to invest more in the future should I choose that option so I look at that as a win in my pocket. Should we incur a large market dip I will take advantage of that and shift my debt pay down back into equity investing and get a Win that way as well.

      • You’re not alone, Tim. I’ve read that investor cash positions are sitting at the highest levels since 2001 right now. If that’s in line with your risk tolerance, then it’s the right decision. I would be doing the same thing if I had mortgage debt; that’s a guaranteed return on your money.

  2. Fully agree with this statement! Human emotion is the single biggest contributor to lost wealth. We are irrational by definition but once emotions can be taken out and we focus on the big picture stocks are just a gold mine, based on historical data. While the market is hot right now I continue to invest regularly but I have been building up some cash in case of a pull back.

    • Totally; the challenge is to resist those emotions when things are looking ugliest. With every market dip, there’s always someone saying “this time it’s different.” Perhaps that will be true some day, but I wouldn’t bet my savings against long-term prosperity. Thanks for taking the time to comment.

  3. So glad you wrote this! I can’t tell you how many times I’ve had this conversation. People hear “stocks” and they 1) immediately think of high risk or 2) believe that they have to do a lot of “work” to do it right. I’ve never really felt bold enough to argue back the point, because people just seem so set in their ways on this one.

    This article makes a similar point to yours, and is one of my favorites:

    Curious, what are your thoughts on Wealthfront, etc.? I’m on it and am enjoying the experience–great charts, tracking etc.–but everyone keeps bugging me that I’m going to get crushed by fees down the line.

    • Hey Allison, thanks for your comment and for sharing that NYT article! You’re right on about the perception that there’s a lot of “work” to do with stocks. People seem to envision sitting on E-Trade buying and selling all day or something.

      Maybe I’ll share my take on robo-advisors in a separate post. I think they’re great if they get people into simple, low-fee investments — and especially if they can help convince people not to sell when the market drops (which is in their interest with percentage-based fees rather than per-trade fees). I don’t use them for a variety of reasons, though, including lack of control over timing of capital gains/losses (important for health insurance), fees, and switching costs (would have to incur a bunch of capital gains to switch over). I also don’t mind managing my own account and harvesting losses from time to time.

  4. In a few years time, I hope that my daughters tell their friends they should be invested in stock. That she says: I have seen my dad doing it and the results are amazing. He had all this freedom, took us on several travels during the summer holidays and gave us a trading account at age 16.

    What a dream…!

    • If you can convince your teenagers to be interested in investing for the future, I think you’ll have won big time! Especially if you’re retired on a beach somewhere 😉

    • Ah, I love that! Our 9 year old is so excited to be able to start buying stocks. It makes a mama’s heart happy. =)

      • That is awesome. I will write sometime about my experience investing as a kid. I ended up losing a ton of money (for a ten-year-old, anyway), and it stuck with me for a long time!

  5. A very good read this at a time of interesting things happening in the investing world.

    Since my time living in the US (from1998), I have experienced two major downturns. The 2000 tech bubble bursting and the 2007-2009 crash. Both severely damaging to a portfolio. When I see people out there talking about their resilience in investing in equities, it does not always come with experience of brutal decimation of their portfolio. Ask any blogger who is about to pull the plug with work on how they would feel if their $1-2 million portfolio was halved (as it pretty much was for an all equities investor in 2008) and you would likely get the answer that they would keep on investing on. Yet reality of watching your hard earned balance sheet plummet on a weekly basis does strange things to the mind. Only experiencing such a dramatic drop can prepare you for what you are actually made of as an investor and what comes next. It is a rapid drop and slow climb back. The slow climb back is much harder and I can imagine a heck of a lot longer without a monthly paycheck.

    But that is what we signup for with pulling the cord on work. This crap can still happen at any point. We can’t predict but we can prepare. Both are actually really hard to do.

    • Really great points, Mr. PIE. It’s been so long since a big crash that many of us have been lulled by the market moving mostly upward seemingly forever. I can’t say I’d be comfortable with my portfolio being cut in half, but I also keep in mind that the withdrawal rate rules of thumb do account for the bad years. We would make some lifestyle and spending adjustments, but even a crash probably wouldn’t send me back to work full-time … at least not immediately.

    • Good comment PIE. It’s easy to talk about risk tolerance in a bull market. As one who survived both 2000-02 and 2008-09 severe bear markets, I hunkered down and wouldn’t check my account for weeks at a time. I kept telling myself – stay with it and even if you don’t buy low, definitely don’t sell low! That’s the way I came through both events and of course, things have recovered and then some. The point is unless you actually see your accounts decline massively and are still able to say, that’s OK (even if you don’t put any money in), you don’t really know your risk tolerance. I will be posting on this topic soon in my website.

  6. I’m going to save this post and send it to every person who questions our investments from now on! I think very few people understand that you’re guaranteed to lose spending power with savings accounts (“savings” sounds soooo good! so promising! so wholesome!), and still think of those things as safe. I feel like we’ve talked about that before, but understanding inflationary risk is what really helped me turn the corner to invest like a real investor instead of mostly using a savings account with some paltry amount in bond mutual funds. (<– slightly embarrassed to fess up to that, especially as a PF blogger!) 😉 Great breakdown as always, friend!

    • Right on! I wonder if the near-zero interest rates of recent years have given people a kick in the butt about savings accounts not being good long-term storage mechanisms — or if they’ll forget again when interest rates eventually rise.

      I’ve had plenty of my own moments of shame with asset choices, too. In 2009, instead of buying mostly stocks, I was “playing it safe” with a lot of cash, bonds, gold, and other low-return stuff. D’oh!

  7. I recall seeing that article about people forgetting about their accounts at Fidelity having the best success. It’s so crazy to think about, but it makes perfect sense with human nature to make emotional investing decisions. I do have some cash in savings as well a bond position in preparation for the road trip, but my long term investments are all equities all the way. Are you routinely selling shares or is the 10-20% that are not in equities enough to cover your expenses?

    • I haven’t had to sell any shares yet. Our first few months were covered by the part-time side hustle gig that I took on (and have since quit). Rental income provides some cash flow, too. But I’ll be low on cash and will need to sell some shares within a few months. It will be interesting to see how that feels after so many years of just buying!

      • You’ll definitely have to write a post bout what that feels like to draw down from the portfolio rather than accumulate. I would imagine it will be strange.

        I’m planning on building up my cash cushion so that I don’t have to sell shares for a while, but we’ll see how it works out. I probably should have a bit more in cash to allow for rebuilding my life after life on the road, but I guess I’m rolling the dice a little bit.

        • There’s definitely some psychological value to keeping a bit of a cash cushion, even if the numbers say it’s better kept in stocks (which it is, on average). Not a bad idea to have a “get resettled” emergency fund, in any case.

  8. Great perspective Matt. I always cringe when people say “so many people lost their shirts in the 08/09 stock market crash.” How the heck did they lose their shirts? My only guess is that they sold at the bottom which is unfortunate and any research into the history of stocks shows that it is a terrible move. Buy and hold and you shouldn’t be disappointed over the long run (at least I hope) 🙂

    • The sad part is that the statement is accurate; many people *did* lose their shirts because they bailed. There’s only one thing that’s difficult about successful investing: not taking action.

  9. I agree 100% with the risk lying withing. I am constantly forcing myself to dollar cost average and not freak out when things go down. It has taken me several years, but I get better at it every day. It will be interesting to see how I handle the next large recession without panicking.

    • That’s an interesting way to think about dollar cost averaging. I mostly frequently hear it talked about as a strategy to reduce risk (avoiding putting in a bunch of money at once right before a big crash, for example) — but if it’s what gets you into the market versus keeping everything in cash, then that’s great.

  10. You hit the nail on the head and I couldn’t agree more. I’m a long term investor and therefore my portfolio is held entirely in equities, no better asset out there. And I think what is most telling is the linked article to how Fidelity found its best performing accounts were those whose owners forgot about them!

    • I love that Fidelity stat! I wish I could find it in a more formal publication or news article (versus just the radio quote linked). That reminds me that my parents have a whole life policy that they swear is the best investment they’ve ever bought. What’s funny about that is that it’s returned less than the stock market over the years — but it truly has been the best investment for them because there are a bunch of barriers to selling or bailing out during big market downturns, so they’ve never messed with it. Whatever works, I guess!

  11. Today is the first time I realized I must not be subscribed to your email list! How am I missing out on this good stuff. Will remedy that right now!

    For a second, I thought, “Crap, did I say that? Maybe it was the whiskey sour talking?” =) But no, I’m 90% into stock while taking a year off as well. =)

  12. Great post! For me, the aha moment with the stock market came when I studied what the market did over the last 100+ years. When the market is new to you, every jolt feels important and consequential. Reading about market history made me realize ups and downs are normal and beneficial. Pick any year over the last 100 and the correct course of action for that year would have been : “do nothing, keep buying”. The temptation is to say “Yes, but this time is different.” Nope. We are not special. We are not snowflakes.

    • Great perspective, Nicolas. It’s easy for today’s minor correction to feel extremely consequential while writing off big recessions of the past as part of the normal cycles of the market. Reminds me of this old Raptitude post: “We human beings suffer from a persistent illusion that creates a huge amount of needless stress: we see today as much bigger and more significant than other days. It seems like we should. Today is the only day we’re able to actually do anything, and the only day we can experience the consequences of what we’ve already done.”

  13. Totally agree, I am mostly in equities too (95%) and simply continue to pile on!

  14. Could be of course that the answer for the question of the appropriateness of stocks could be “yes” for your friend and “no” for the father, depending on their ages, overall financial situation, health, retirement lifestyle, ambitions, etc.

    • That’s an excellent point. In this case, I think the father’s take on stocks was the result of day-trading and selling when the market dropped — but you’re right that different life situations warrant different strategies. Thanks for commenting.

  15. Hi,
    This is a great article to revisit a few months or years from now when the markets go south. I agree that we bring the risk into the equation and it’s hard to predict your true risk tolerance until you hit a major recession.

    • Definitely easy to overestimate our risk tolerance when the market has been climbing steadily for so long. I’ll be reading alongside you in the next crash.

  16. If you are serious about building a future income stream , there is only one asset class designed to deliver – Equities !

  17. I love the punchy title! And your “blind” numbers example. How awesome is it that the straightforward approach is also the lucrative one.

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