← Money Lessons with Andrew Temte, PhD, CFA
Money Lessons with Andrew Temte, PhD, CFA
Why Own Stocks? The Long-Run Case for Building Wealth
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Owning stocks has been the most reliable way ordinary people have built real wealth. Not by picking the one brilliant company and not by trading in and out at the right moments, but by owning a broad slice of the market, adding to it steadily and staying invested long enough for the equity risk premium and compounding to work together what those long run gains have gone to the patient investor, not the clever trader. Hi, I'm Andy Tempte and welcome to Money Lessons. Join me every Saturday morning for bite sized lessons that are designed to improve financial literacy around the world. Today is July 25, 2026. Last week we widened the map to international stocks and said why the rest of the world belongs in your portfolio right alongside American companies. Today we step back from the mechanics and ask the biggest question of why own stocks at all. That question is big enough that we'll take two weeks to answer it. This week, the case for owning stocks over a lifetime and and next week, the limits of that case. So over long stretches of time, stocks have paid their owners more than bonds or cash. Not in every year. Some years stocks fall really hard, but stretch the horizon to 10 or 20 years and stocks have come out ahead in the vast majority of periods. These numbers come from a data set that Professor Ashwath Demodaran at New York University updates every year, going all the way back to 1928. Since then, nearly a hundred years, American stocks have returned about 10% a year on average, with dividends reinvested. Long term government bonds have returned about 5%. And cash, which is money parked in short term treasury bills, the place with the fewest ups and downs, well, that's returned about 3%. Now those figures are before we account for inflation. Inflation over that same stretch ran about 3% a year. So after inflation, which is your real return, stocks earned roughly 7%, bonds about 2%, and cash earned as you might expect about nothing. Over the long term, holding cash has just barely kept pace with rising prices. It spared you the day to day swings, but after inflation it left your wealth roughly where it started. That yearly difference is already large and over decades it compounds into a vast difference. $100 invested in stocks in 1928 would have grown to roughly $1.16 million by the end of last year, while that same hundred dollars in government bonds grew to about $7,750 and in cash to about $2,600. Same starting $100. Wildly different endings. Now. The extra return that stock owners have earned over and above bonds and cash in exchange for bearing more risk is the Equity risk premium. That return is your compensation for taking on risk that is real. Stock prices swing, companies fail, markets crash. You earn the equity risk premium precisely because you agreed to live with those ups and downs. The premium is compensation for real risk and is not a guarantee over long horizons. That advantage has been dependable over short periods. It is not in a single year or even three or four years. Stocks can lose money. And sometimes they keep losing money for years at a time. Now, what turned that $100 invested in 1928 into more than a million was compounding. Compounding means earning returns not just on the money you put in, but on all the returns your money has earned, so that each year's gains go on to earn gains of their own. Compounding is what turns the equity risk premium from a yearly advantage into a life changing sum. Remember the example, our late summer 2025 episodes on compounding said $5 a day. The price of a fancy latte invested steadily in a broad stock market fund. At the market's long run average, over 40 years, that $5 a day grew to no, nearly a million dollars. And of that ending balance, only about $73,000 was money that the saver actually set aside. Everything above that, more than $900,000 came from compounding. So the equity risk premium and compounding work together. The premium gives stocks a higher average return than bonds or cash. And compounding multiplies that advantage over a lifetime. Neither works without the other, and neither one works very fast. They reward the investor who buys, holds and keeps the money invested. For decades now, for generations in America, the main way that ordinary families built wealth was by owning a home. For most middle class households, the equity in their house, the part that they own outright free of the mortgage, is still the largest asset that they have. Owning has been the path, but that path has narrowed. On the home ownership side, the typical existing home now sells for around $440,000, an all time high and more than $80,000 higher than it was just five years ago. And a home is a lumpy purchase. To buy one, you generally need a large pile of cash up front for the down payment. Even down on a $440,000 house is roughly $44,000 in cash before you can even get started. Also, mortgage rates that sat near 3% just a few years ago climbed above 7% and now sit at around 6.5%, which raises the monthly cost of the loan on top of the down payment. So for a lot of people, especially younger people just starting out that first door to Ownership has gotten very hard to push open. But something has changed on the other side. Owning a piece of the stock market used to carry its own barriers. A commission on every trade and the need to buy whole shares that could cost hundreds of dollars each. Both of those barriers have fallen. Commission free trading and fractional shares, the ability to buy a sliver of a single share, mean that you can become a part owner of a basket of the world's companies for the price of that same five dollar coffee. The down payment on ownership in stocks, in other words, has dropped from tens of thousands of dollars to just a few dollars. Now, I want to be careful here because this is not advice to give up on buying a home. A home is shelter that you live in and a mortgage is a form of forced savings that has served families well for a very long time. This argument is about a door that has opened, not one that is closed. If the traditional path to ownership is out of reach for you, right, you are no longer shut out of ownership itself. You can start small, a few dollars at a time, invested in a diversified way and left to compound for years. That is how small sums become large sums, a little at a time given room to grow. Now the two kinds of ownership, homeownership and stock ownership, differ in another way, too. Buying a house is a large infrequen and complicated transaction, and the buyer is often at an information disadvantage, a point that we explored in our June 13 episode on information asymmetry. In contrast, buying a share of a public company works differently. The price is public, the same for everyone in the market at that moment, and the company is required by law to disclose its finances. That doesn't make stock investing risk free or perfectly fair. But you don't have to out negotiate a seller across a kitchen table to buy at a fair price. Now, what does all this mean for you? Over a lifetime, owning stocks has been the most reliable way ordinary people have built real wealth. Not by picking the one brilliant company and not by trading in and out at the right moments, but by owning a broad slice of the market, adding to it steadily and staying invested long enough for the equity risk premium and compounding to work together. Those long run gains have gone to the patient investor, not the clever trader. And the entry point has never been lower. You don't need tens of thousands of dollars and you don't need to wait until you can buy a house. You need a little money set aside regularly and time ownership is no longer something you postpone until you're wealthy. For most people it's how you get there. Now. If you are in your late teens or twenties, start now. Put a set amount into a diversified stock fund every month or every day, automatically, whether the market is rising or falling, and keep at it. Time is the one ingredient you can not buy later, and it is the ingredient that you have the most of right now at this point in your life. I meet people in their mid-30s who feel priced out of a first home, who cannot pull together the down payment, and who are really discouraged by it. Homes have grown more expensive. That part is real, and we just walked through it. But a steady investing habit begun at 20 could have grown through the very equity risk premium and compounding that we've described into the down payment that feels impossible at age 35. $5 a day, invested early and left. The compound is how an ordinary person builds the lump sum a house requires. You cannot make up for those lost years with a burst of saving at the end. The market rewards the decades you give it, not the urgency you feel once you're behind. If you're young, the most valuable thing you own is time, and I implore you to use it well. Next week, we finish the series. The equity risk premium is real, but it is neither free nor guaranteed. Stocks fall sometimes for years, and the hardest part of owning them isn't buying in, it's holding on through the bad stretches without selling. We'll look at why jumping in and out of the market tends to leave investors with lower returns, not higher returns, and why the biggest obstacle to capturing the long run premium is very often your own behavior. So until next week, I wish you grace, dignity and compassion. My name is Andy Tempte and this is Money Lessons. You can find the show on all the major streaming services as well as out on YouTube. Please like subscribe, rate and most importantly, share this public educational good with your friends, your family, your colleagues, and maybe a neighbor. The show is produced by Nick Tempte and we'll see you next time on Money Lessons.