No Asset Is Safe—But Some Lose Less – CFA Institute Enterprising Investor

There may be an uncomfortable reality each investor should confront: your capital is rarely actually secure. 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 at present, together with the duty to safeguard and develop it over the following decade. Your main objective: protect its actual worth — and ideally improve it. As a cautious steward, how would you allocate this capital?

At first look, the reply appears easy: maintain it secure, 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 12 months.[1] This implies hiding money underneath 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 nations like the US and different western nations have on common saved tempo with inflation. The common short-term saving fee, proxied by short-term US T-bills, averaged 3.0% per 12 months.

Averages masks vital losses, nevertheless. Within the Nineteen Forties and early Fifties, throughout a interval of monetary repression, rates of interest have been held artificially low whereas costs crept larger. This was achieved to convey down the debt of the governments that have been closely indebted after World Warfare 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 could be even slower). This can be a image which is counterintuitive. Your financial savings should not secure when you’ve got 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, brought on an actual loss in worth of almost 20%. Over time, this destructive 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 tough.

The Phantasm of Security

These episodes underscore a elementary reality: even belongings that really feel secure — 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 having a bet. Inflation and market volatility are ever-present forces.

Over longer horizons, the road between saving and investing begins to blur. What feels steady 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 following step past saving is authorities bonds. They sometimes supply about 1% extra yield than a financial savings account and are sometimes considered as a safer different to equities. However secure from what?

Bond traders have confronted difficult durations since 1900. After World Warfare I, a postwar financial growth led to rising inflation, which eroded the buying energy of presidency bonds issued in the course of the warfare. These so-called Liberty Bonds got here with low fastened rates of interest, which shortly turned unattractive within the new inflationary surroundings. The Federal Reserve responded by elevating charges, and bond costs fell sharply, amplifying losses in the course of the recession and deflation that adopted within the early Twenties.

An identical sample adopted World Warfare II: artificially low rates of interest and a protracted 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. Bear in mind: it takes a 100% achieve to get better from a 50% loss.

As of 2025, traders are as soon as once more in a “bond winter,” going through a cumulative actual lack of round 30%, pushed by the excessive inflation of the early 2020s and the next rise in bond yields.

Exhibit 2. Actual Drawdowns US Bonds

Sources: McQuarrie (2024) and Robeco

Shares: Lengthy-Time period Achieve, 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 robust restoration, it took a few years, even a long time, for many traders to totally heal. Not each dip is adopted by a swift restoration. Inflation, usually neglected, 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 21^st century alone had three drawdowns of greater than -30% in actual phrases. These large and frequent losses are a characteristic of inventory markets. As a result of losses are likely to happen all of a 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 larger 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 that 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 take a look at each short-term (one-year) and long-term (10-year) threat utilizing the conditional worth in danger (CVar) — a measure of common losses within the worst durations — also called the primary decrease partial second (LPM1). This measures the anticipated loss within the worst durations, particularly these under the inflation fee.

Financial savings accounts, whereas usually seen as secure, can quietly erode wealth over time. The common actual loss trying again 10 years (CVar) was -17%. Over shorter durations, 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 secure 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 durations, losses ranged from -4% anticipated to -25% max.

Gold, usually considered as a secure 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 have been -44% and -68%, respectively, with excessive common drawdowns as properly, even larger than shares. Regardless of this, it could possibly nonetheless function a helpful diversifier — significantly when mixed with regular shares.[3]

Equities ship the best long-term returns, but additionally the best drawdowns. The common loss was -15%, and even in a single unhealthy 12 months, 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 hardly ever 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 an actual, long-term lens, a really totally different image emerges. Money and bonds could seem steady within the brief run, however they carry substantial long-term threat as soon as the main focus shifts to inflation and long run potential losses.

The takeaway is straightforward: in the long term, all investments are dangerous. Even financial savings. What issues most isn’t whether or not you face threat, however the way you handle this threat.

Exhibit 5 — Abstract Threat Ranges by Asset Class

Regular Shares Provide a Center Approach

You may’t conceal from threat. After getting capital, you’re uncovered — whether or not you save or make investments. The excellent news is that threat might be lowered by diversification throughout asset courses: bonds, equities, financial savings, and even gold. This is without doubt one of the few “free lunches” in finance, lowering threat with out sacrificing return. But even in a basic 60/40 portfolio, many of the threat nonetheless comes from equities.

There’s a higher means: cut back inventory market threat by specializing in steady corporations, generally known as “widow and orphan shares.” These corporations are likely to ship constant returns, very like bonds, however with an necessary 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 sturdy bull markets, however they have a tendency to carry up higher throughout downturns. Within the brief run, they actually should not as “secure” as bonds or financial savings, however they’re much less dangerous than the broad fairness market. In the long term, they provide sturdy 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 usually shorter when investing within the full inventory market which additionally contains 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. Trying forward, returns are prone to be decrease. Multiples have expanded, driving down anticipated returns. With US debt/GDP ranges close to post-war highs (similar to 1918 and 1945) and fairness valuations close to all-time highs, forward-looking actual returns will possible 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 robust case for each diversification and regular shares. A portfolio absolutely allotted to regular shares displays comparable anticipated losses as a standard 60/40 portfolio. But, being absolutely invested in shares means tail threat which is obvious because the most actual losses are larger for regular shares than for the 60/40 combine.

Due to this fact, a gradual 60/40 portfolio deserves consideration. This portfolio replaces equities with defensive equities and has decrease draw back threat, similar to the ultra-conservative everlasting portfolio which invests 25% in shares, bonds, financial savings and gold, however with meaningfully larger returns.[5]

The numbers converse for themselves: changing (a part of) the fairness portfolio with a defensive fairness technique helps to cut back draw back threat. It’s so efficient that it gives just about comparable draw back safety because the ‘extremely conservative’ everlasting portfolio.

Nonetheless, no technique absolutely 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 is no such thing as a risk-free choice as soon as your horizon is lengthy and open-ended.

The Regular 60/40 Portfolio gives a compelling mix of inflation safety and inventory market resilience. Whereas already sturdy, it serves as a robust start line open to considerate refinements. As an illustration, including 5% to 10% in gold or commodities, as within the Everlasting Portfolio, could additional cut back drawdowns throughout inflationary durations such because the Twenties, Nineteen Seventies, and 2020s. Further enhancements —  like momentum, or worth indicators — can enhance long-term returns by alpha.

The optimum combine finally will depend on an investor’s threat urge for food and time horizon, making it adaptable to a spread of preferences. However the first-order impact is obvious: inventory market threat is the biggest supply of long-term portfolio losses — and it may be lowered with an allocation to bonds. Nonetheless, one other efficient solution to decrease threat 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 threat in an inflationary surroundings.

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 proof against actual losses. However some portfolios lose much less, and shedding much less provides 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 threat. Placing every part in equities will increase each short- and long-term drawdowns.

A gradual portfolio — one that features a substantial allocation to low-volatility, conservative equities — gives a compelling mixture of inflation safety, market stability, and long-term return. The information present that such portfolios cut back actual drawdowns considerably in comparison with each an all-equity allocation and a standard 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 following decade. You now acknowledge that it’s not a simple job however a balancing act. As an alternative of 100% saving, historical past suggests the most effective safety comes from diversified investing, together with a significant allocation to regular shares.

Key Takeaways

• Over lengthy horizons, no asset is really secure — not even money.
• Historic knowledge present regular shares mix resilience with enticing returns.
• Diversifying throughout higher — not simply extra — belongings reduces drawdowns.

Pim van Vliet, PhD, is the writer of Excessive Returns from Low Threat: A Exceptional 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. Out there at SSRN 3969743.

McQuarrie, E. F. (2024a). Shares for the long term? Generally sure, generally no. Monetary Analysts Journal, 80(1), 12-28.

McQuarrie, E.F. (2024b) Introducing a New Month-to-month Collection 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? Generally sure, generally 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 might be downloaded at paradoxinvesting.com/knowledge. Information 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 in opposition to inflation, deflation, recession, and market threat.