There may be an uncomfortable reality each investor should confront: your capital is rarely really protected. 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 as we speak, together with the duty to safeguard and develop it over the subsequent decade. Your main purpose: protect its actual worth — and ideally enhance it. As a cautious steward, how would you allocate this capital?
At first look, the reply appears simple: preserve it protected, maybe in a financial savings account. However on nearer inspection, the selection is much from easy. Historical past reveals that even essentially the most secure-seeming choices can carry hidden dangers.
Capital at Threat, All the time
To know this, let’s flip to historical past. Utilizing US monetary knowledge from January 1900 to December 2024, we discover that inflation averaged 3.0% per yr.[1] This implies hiding money below 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 in addition 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 fee, proxied by short-term US T-bills, averaged 3.0% per yr.
Averages masks vital losses, nevertheless. Within the Forties and early Fifties, throughout a interval of monetary repression, rates of interest had been held artificially low whereas costs crept greater. This was executed to convey down the debt of the governments that had been closely indebted after World Struggle II. Savers witnessed an actual loss in buying energy of greater than 40%.
Exhibit 1 serves as a wake-up name to savers. It reveals the peak-to-bottom actual return of US T-bills. It has a most lookback window of 10 years (in any other case restoration can be even slower). It is a image which is counterintuitive. Your financial savings are usually not protected when you could have 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 monetary repression seems to be underway. The inflation spike of 2022, mixed with rates of interest lagging behind, precipitated an actual loss in worth of almost 20%. Over time, this unfavorable actual fee 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 can be troublesome.
The Phantasm of Security
These episodes underscore a basic reality: even property that really feel protected — 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 betting. 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 brief time period could fail to protect worth in the long run.
Authorities Bonds: Safer—However Secure Sufficient?
For a lot of traders, the subsequent step past saving is authorities bonds. They usually supply about 1% extra yield than a financial savings account and are sometimes considered as a safer various to equities. However protected from what?
Bond traders have confronted difficult intervals since 1900. After World Struggle I, a postwar financial increase led to rising inflation, which eroded the buying energy of presidency bonds issued through the struggle. These so-called Liberty Bonds got here with low mounted rates of interest, which shortly turned unattractive within the new inflationary atmosphere. The Federal Reserve responded by elevating charges, and bond costs fell sharply, amplifying losses through the recession and deflation that adopted within the early Nineteen Twenties.
An identical sample adopted World Struggle 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 almost 50% in actual phrases. That’s not simply volatility, that’s wealth destruction. Keep in mind: it takes a 100% acquire to recuperate from a 50% loss.
As of 2025, traders are as soon as once more in a “bond winter,” dealing with a cumulative actual lack of round 30%, pushed by the excessive inflation of the early 2020s and the following 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 almost -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 reveals that historical past is filled with market corrections of -20% or extra. The twenty first century alone had three drawdowns of greater than -30% in actual phrases. These enormous and frequent losses are a function of inventory markets. As a result of losses are inclined to happen all of the sudden, most traders are properly 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 greater than bonds. But over multi-decade horizons, equities can nonetheless disappoint. Current analysis by Edward McQuarrie means that even within the nineteenth century, shares didn’t constantly outperform bonds, difficult the concept equities are at all times the most secure long-term funding.[2]
Evaluating Asset Courses
We look at actual losses — the decline in buying energy — throughout 4 key asset courses: financial savings accounts, authorities bonds, gold, and equities. We have 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 intervals — also called the primary decrease partial second (LPM1). This measures the anticipated loss within the worst intervals, particularly these under the inflation fee.
Financial savings accounts, whereas usually seen as protected, can quietly erode wealth over time. The typical actual loss wanting again 10 years (CVar) was -17%. Over shorter intervals, 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 protected within the brief run, however are removed from safe over longer horizons.
Bonds supplied 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 typical long-term loss was smaller at -10%. Over one-year intervals, losses ranged from -4% anticipated to -25% max.
Gold, usually considered as a protected haven, is unstable in each the brief and future. It carried out particularly properly 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 properly, even greater than shares. Regardless of this, it could nonetheless function a helpful diversifier — significantly when mixed with regular shares.[3]
Equities ship the very best long-term returns, but additionally the best drawdowns. The typical loss was -15%, and even in a single dangerous yr, 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 —Threat and Return of Asset Courses
Sources: McQuarrie (2024) and Robeco
These long-term numbers are not often proven — and for good motive. Most empirical analysis focuses on short-term, nominal returns, which supply extra statistical energy however assume traders solely care about month-to-month volatility. When considered by means of an actual, long-term lens, a really totally different image emerges. Money and bonds could seem secure within the brief 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 is just not whether or not you face danger, however the way you handle this danger.
Exhibit 5 — Abstract Threat Ranges by Asset Class
Regular Shares Provide a Center Method
You possibly can’t conceal 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 lowered by means of diversification throughout asset courses: bonds, equities, financial savings, and even gold. This is among 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 corporations, typically known as “widow and orphan shares.” These corporations are inclined to ship constant returns, very like bonds, however with an essential benefit: their earnings can develop with inflation.
I’ve studied and written extensively on this funding model in tutorial papers and within the ebook Excessive Returns from Low Threat. These low-volatility shares could lag throughout robust bull markets, however they have a tendency to carry up higher throughout downturns. Within the brief run, they actually are usually not as “protected” 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, significantly 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 typically shorter when investing within the full inventory market which additionally consists of the riskiest shares. Historic deep knowledge 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. Wanting 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 (akin to 1918 and 1945) and fairness valuations close to all-time highs, forward-looking actual returns will probably be extra modest. (See weblog: “When the Fairness Premium Fades, Alpha Shines.”)
Nonetheless, the relative efficiency of regular shares stays compelling.
Exhibit 6: Threat and Return of Portfolios
Sources: McQuarrie (2024) and Robeco
Apparently, 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 conventional 60/40 portfolio. But, being totally invested in shares means tail danger which is obvious for the reason that most actual losses are greater for regular shares than for the 60/40 combine.
Subsequently, a gradual 60/40 portfolio deserves consideration. This portfolio replaces equities with defensive equities and has decrease draw back danger, akin to the ultra-conservative everlasting portfolio which invests 25% in shares, bonds, financial savings and gold, however with meaningfully greater returns.[5]
The numbers converse for themselves: changing (a part of) the fairness portfolio with a defensive fairness technique helps to scale back draw back danger. It’s so efficient that it affords 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 median 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 affords a compelling mix of inflation safety and inventory market resilience. Whereas already strong, it serves as a powerful place to begin open to considerate refinements. As an example, including 5% to 10% in gold or commodities, as within the Everlasting Portfolio, could additional cut back drawdowns throughout inflationary intervals such because the Nineteen Twenties, Nineteen Seventies, and 2020s. Extra enhancements — like momentum, or worth indicators — can increase long-term returns by means of alpha.
The optimum combine finally relies on an investor’s danger urge for food and time horizon, making it adaptable to a spread of preferences. However the first-order impact is evident: inventory market danger is the most important supply of long-term portfolio losses — and it may be lowered with an allocation to bonds. Nonetheless, one other efficient option 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 shedding 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 every part in equities will increase each short- and long-term drawdowns.
A gentle portfolio — one that features a substantial allocation to low-volatility, conservative equities — affords 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 conventional 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 subsequent decade. You now acknowledge that it’s not a simple activity however a balancing act. As an alternative of 100% saving, historical past suggests the very best safety comes from diversified investing, together with a significant allocation to regular shares.
Key Takeaways
Over lengthy horizons, no asset is actually protected — not even money.
Historic knowledge present regular shares mix resilience with enticing returns.
Diversifying throughout higher — not simply extra — property reduces drawdowns.
Pim van Vliet, PhD, is the creator of Excessive Returns from Low Threat: A Outstanding 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. Obtainable at SSRN 3969743.
McQuarrie, E. F. (2024a). Shares for the long term? Typically sure, typically no. Monetary Analysts Journal, 80(1), 12-28.
McQuarrie, E.F. (2024b) Introducing a New Month-to-month Sequence 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 Different Investments (2023).
CFA Institute Enterprising Investor. Could 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, typically 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 answer.
[4] The Conservative System knowledge are used and from 1929 will be downloaded at paradoxinvesting.com/knowledge. Knowledge 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-Secure 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.
