Week 9 Day 4: Stocks Have Beaten Inflation for 200 Years

Stocks beat inflation. Bonds roughly matched it. Gold roughly matched it. Cash lost to it. Over 200+ years, this pattern has been remarkably consistent. If your goal is to grow purchasing power over decades, stocks are the proven vehicle.

Jeremy Siegel's research in 'Stocks for the Long Run' tracks this definitively. From 1802-2021, $1 invested in: Stocks: grew to $2.1 million (6.7% real annual return). Bonds: grew to $1,825 (3.5% real). Treasury bills: grew to $275 (2.5% real). Gold: grew to $82 (0.6% real). Cash (CPI-adjusted): shrank. The S&P 500's real return of 6.7% means that stocks have not only kept pace with inflation but dramatically outpaced it -- roughly doubling purchasing power every 10.7 years. Over a 30-year career, $10,000 in stocks grew purchasing power 7x while the same $10,000 in a savings account lost 50%+ of its purchasing power. The gap is not close. For anyone with a 10+ year time horizon, the decision between stocks and cash savings should not be agonized over.

Siegel's data reveals an interesting phenomenon called 'mean reversion of equity returns' -- over long horizons (15+ years), stock returns converge toward their long-term mean of ~6.7% real with remarkably low variance. The standard deviation of 1-year stock returns is approximately 18%. But the standard deviation of 20-year annualized returns is approximately 2.5%. This means that over 20-year horizons, stocks are actually less risky than bonds when measured by range of real return outcomes. This led Siegel and others to argue that for long-horizon investors, the real risk is not stock volatility but inflation erosion from non-equity assets. The counterargument (most notably from Zvi Bodie and Lubos Pastor & Robert Stambaugh) is that parameter uncertainty -- not knowing the true expected return distribution -- makes stocks riskier at long horizons than the historical data suggests. The debate remains active, but the empirical record favoring equities over 200+ years is difficult to dismiss.