Stocks are still one of the greatest asset class? OR are they?

Stocks are still one of the greatest asset class due to their historical outperformance over the long term.

They represent ownership in companies and offer the potential for significant capital appreciation as these companies grow and prosper.

The allure of stocks lies in their ability to provide investors with a share of the economic growth, innovation, and productivity improvements within an economy.

While the stock market can be volatile in the short term, historical data suggests that equities have provided higher returns over extended periods compared to bonds or cash .

I personally adopt passive investing, particularly through index funds, and have been working well — my return on a single fund ranges from 20–30%, and annualised return ranges 6–13% per year in the last 7 years. I started with $10,000 initial capital, and now my passive portfolio which took me less than 5 mins a month to manage (really what I did is log in to have a look lol — since I’ve set up automatic buy in), has grown to more than 6 figures.

Basically, passive investing in index funds is characterized by minimal trading and lower costs, which can make a significant difference in the long run.

The strategy involves buying and holding a market index, and benefiting from the market’s overall growth over time.

In this article, I’ll share more about why stocks is still one of the best asset class you can invest in, and introduce a basic, beginner friendly portfolio, for those who want to achieve freedom in time, money and also have peace of mind (even when the market is uncertain or going through crisis).

Part 1: The Role of Stocks as a Premier Asset Class

Stocks have long been considered one of the best asset classes for investors due to a variety of compelling reasons.

Historically, stocks have provided higher long-term returns compared to other asset classes such as bonds, commodities, or cash equivalents.

For instance, data from S&P Dow Jones Indices show that over the long term, large-cap U.S. stocks have delivered an average annual return of around 10%, significantly outpacing inflation and other investments.

What’s more, stocks offer more than dividend, it also give us the potential to benefit from capital appreciation.

This is because stocks represent ownership in companies, and as these companies grow and become more profitable, the value of their stock tends to increase. This potential for capital appreciation is a key driver of long-term wealth creation.

And the cash flow from dividend! It’s real and the only true passive income in my view.

Many stocks pay dividends, providing investors with a steady stream of income.

Dividends can be reinvested to purchase additional shares, further compounding the growth of an investment.

What’s more, investing in stocks is inflation protected.

In contrast to fixed-income investments like bonds, which can see their real value eroded by inflation, stocks can offer protection against inflation due to their ability to increase earnings and dividends over time.

This is because companies can often pass on rising costs to consumers, maintaining or even improving profit margins.

And one of the best things about investing in stocks is its liquidity (versus real estate which I also invest in)

Stocks are highly liquid assets, meaning they can be bought and sold easily on exchanges around the world.

This liquidity provides us with the flexibility to access their funds with relative ease, which can be crucial in times of need.

If you’re still looking for more reasons to invest in the stock market despite all the horror story, the stock market offers a vast array of companies across various sectors and industries, allowing us to build a diversified portfolio that can spread risk and capture a wide range of growth opportunities.

The same diversification opportunity wouldn’t be available for real estate or gold lol.

Moreover, investing in stocks has become more accessible to the average person than ever before, with low-cost brokerages, robo-advisors, and index funds allowing even small investors to participate in the market.

Even if you have minimal capital, say $100, or $1000, you can get started investing in stocks! How awesome that is.

As the global economy grows, companies play a pivotal role in driving this growth. By investing in stocks, investors can tap into the expansion of various industries and benefit from the overall increase in economic activity.

Psychologically, owning stocks can give investors a sense of participation in the commercial success of well-known brands and cutting-edge technologies, providing us with a sense of involvement in broader economic success. (if that matters to you)

There are also potential tax benefits, many countries offer tax-advantaged accounts like IRAs, 401(k)s, or RESPs that encourage long-term investing in stocks by providing tax benefits, further enhancing the appeal of stock investments.

Overall, while stocks do carry risks, particularly in the short term, their potential for high returns, income generation, liquidity, and diversification benefits make them an attractive asset class for long-term investors (like us).

It’s important for investors to consider our own risk tolerance, investment goals, and time horizon when deciding how much of our portfolio to allocate to stocks.

Part 2: The Harry Browne Permanent Portfolio

I’ll share more about why stocks is still one of the best asset class you can invest in, and introduce a basic, beginner friendly portfolio, for those who want to achieve freedom in time, money and also have peace of mind (even when the market is uncertain or going through crisis).

The Permanent Portfolio, introduced by the late American investment writer Harry Browne, is a diversified investment strategy designed to provide stability and growth over the long term, irrespective of economic conditions.

The portfolio is equally divided into four asset classes, each comprising 25% of the total portfolio:

1. Stocks: Representing ownership in corporations, typically through a broad market index fund, to capture economic growth.
2. Long-Term Treasury Bonds: Offering fixed income and performing well during economic downturns or deflationary periods.
3. Cash: Held in highly liquid forms such as money market funds, providing safety and preserving purchasing power during inflation.
4. Gold: Serving as a store of value and hedge against inflation or currency devaluation, often held in physical form, gold ETFs, or gold mining stocks.

This portfolio suggests to rebalance when any asset class moves more than 10% away from its target 25% allocation .

To implement the Permanent Portfolio strategy, one can select ETFs that represent each asset class (here’re just some reference, not recommendation to invest):

• For stocks, a total stock market ETF like VTI (Vanguard Total Stock Market ETF) could be used.
• For long-term treasury bonds, TLT (iShares 20+ Year Treasury Bond ETF) is a suitable choice.
• Cash can be represented by a money market ETF such as BIL (SPDR Bloomberg Barclays 1–3 Month T-Bill ETF).
• For gold, an ETF like GLD (SPDR Gold Shares) provides exposure to the precious metal.

Over the past decade, the Permanent Portfolio has demonstrated consistent returns with lower volatility compared to traditional stock and bond portfolios.

According to PortfoliosLab, as of July 2024, the portfolio has shown an annualized return of 5.51% in the last 10 years, with a Sharpe ratio of 1.55, indicating its risk-adjusted performance .

The portfolio’s maximum drawdown was 19.44%, showcasing its resilience even during market downturns.

Part 3: who’s this for and who’s this not for:

The Harry Browne Permanent Portfolio is an appealing strategy for investors seeking a balance of stability and growth, with the potential to achieve time and money freedom.

Its diversification across different asset classes provides a level of protection against various economic scenarios, which is crucial for preserving capital and ensuring financial security over the long term.

But still it’s not suitable for everyone. Here’s a list of people who this portfolio may be suitable for:

1. Risk-Averse Investors: Those who prefer a conservative investment strategy and wish to avoid significant exposure to market volatility find the Permanent Portfolio’s diversification appealing.
2. Long-Term Investors: Investors with a long-term perspective, who understand that the portfolio is designed to perform well over extended periods, will appreciate its steady growth potential.
3. Retirement Savers: Individuals looking for a reliable strategy to grow their retirement savings can benefit from the portfolio’s balance of assets, which aims to provide both growth and stability.
4. Investors Seeking Diversification: The Permanent Portfolio’s equal allocation across different asset classes offers instant diversification, which can be attractive for those looking to spread risk.
5. Inflation-Wary Individuals: With a quarter of its assets in gold and another quarter in cash (or cash equivalents), the portfolio can act as a hedge against inflation, protecting the purchasing power of an investor’s capital.
6. Those Seeking Simplicity: Investors who prefer a “set it and forget it” approach will appreciate the Permanent Portfolio’s straightforward allocation and the need for only occasional rebalancing.
7. Globally Minded Investors: The portfolio typically includes international stocks, providing exposure to global economic growth and diversification from U.S.-centric market risks.

Here’s a list of people who this portfolio may NOT be suitable for:

1. Aggressive Growth Seekers: Investors looking for rapid capital appreciation may find the Permanent Portfolio’s conservative nature too limiting for their high-growth ambitions.
2. Short-Term Investors: Those with a short investment horizon might not benefit from the portfolio’s long-term, steady growth approach, especially during periods of market volatility.
3. Investors with High Cash Needs: The portfolio’s significant allocation to cash and gold might be unsuitable for those needing high liquidity or expecting to make large cash withdrawals in the short term.
4. Sector-Specific Enthusiasts: Investors with a strong belief in specific sectors or industries might prefer a more focused investment strategy rather than the broad diversification offered by the Permanent Portfolio.
5. Those Unaware of Gold and Bond Market Nuances: Investors who do not understand or agree with the portfolio’s use of gold as a hedge against inflation and the role of bonds during economic downturns might not find this strategy suitable.

All in all, the Permanent Portfolio could offer a time-tested approach to investing that can help investors navigate through different economic cycles while working towards financial independence.

By combining stocks for growth, bonds for stability, cash for safety, and gold as a hedge, the portfolio provides a balanced and diversified investment strategy.

However, like any investment strategy, it has its limitations and may not align with everyone’s financial goals, risk tolerance, or investment time horizon.

After all, we should consider our personal financial situation in building our own portfolio.