It’s likely the single most important chart you’ll see all year.
Especially if you’re tempted to bail on your stocks and go for the “safety” of cash instead.
It tracks inflation-adjusted, or “real,” returns for the S&P 500 against the buying power of the U.S. dollar over the past 70 years.
As you can see, dollars stuffed under the mattress lost 91% of their value (red line) over that time.
Meanwhile, the S&P 500 (blue line) grew investors’ wealth in real terms by 1,500%.
Look back at the chart.
You’ll also notice the red line representing the value of the dollar is quite smooth. But the blue line for the S&P 500 looks like a roller-coaster ride.
To earn that 1,500% return you had to strap in… and hold on tight.
And as you know, if you have money in the markets in 2022, that’s not easy.
But it’s necessary…
The chart’s message is stark. Over the past 70 years, investors who held on grew rich. Those who didn’t became poorer.
The same is true today… Stocks may be a bumpy ride compared to cash. But they’re still the best way to grow wealth over time.
And as you’ll see, something called the Coffee Can Portfolio can help you stay the course for the long term.
But before we get to that, it’s important for you to grasp a fundamental truth about investing…
When you invest in stocks, you’re buying ownership stakes in businesses.
And businesses are risky by nature.
Many fail. Even successful companies go through dramatic changes in fortune.
This makes it hard to figure out what a company’s shares are worth. Different opinions on their values cause share prices to bounce around a lot. That’s what Wall Street calls volatility.
And thanks to crowd psychology, we get bull markets and bear markets, as investors become too greedy or too fearful all at once.
We even get bubbles… and busts.
It’s why I’m always keen to remind you that volatility is a feature, not a bug, of the stock market.
If you believe you can build wealth in stocks… and not have a white-knuckled ride from time to time … you’ve been sold a lie.
Market history shows us we can render it harmless by holding stocks for the long term.
This is one of the most overlooked investing “hacks.” Probably because it requires patience. And patience is a scarce resource these days. But the numbers are startling…
Investment management firm Capital Group looked at annual returns for the S&P 500 over the 91 years ending December 31, 2018.
It found that in 27% of those years, investors lost money.
But over that time, investors who held the S&P 500 for three-year periods lost money just 17% of the time.
Over five-year periods, they lost just 13% of the time.
And over 10-year periods, they lost just 6% of the time.
The takeaway is clear: The longer you hold onto your stocks, the greater your chance of making a profit and avoiding a loss.
As I showed you on Tuesday, trading ace Imre Gams has racked up 13 straight winning trades in the currency market.
And so far this year, Teeka Tiwari has closed 23 recommended trades for an average annualized gain of 30.1% at his Alpha Edge trading advisory. (To learn how, go here.)
But you’re not going to put your entire nest egg into a trading strategy.
It’s better to have a large chunk of your wealth in stocks for the long run… and a smaller chunk set aside for trading.
And if you get shaken out of your long-term stock holdings every time a bear market comes around, you’re going to get killed.
You’ll end up buying high and selling low… which is the opposite of what you need to do to profit.
It’s an idea I got from my old friend Chris Mayer.
He’s a brilliant value investor who used to head up two advisories here at Legacy Research.
But Chris got it from Robert Kirby, then a portfolio manager at Capital Group.
As Kirby put it in a 1984 article in the Journal of Portfolio Management…
The coffee can portfolio concept harkens back to the Old West, when people put their valuable possessions in a coffee can and kept it under the mattress. The success of the program depended entirely on the wisdom and foresight used to select the objects to be placed in the coffee can to begin with.
The idea is simple…
You buy a group of your favorite stocks for the long haul. Then you commit to holding onto them for at least 10 years, regardless of what the market throws at you.
This keeps you safe from volatility… because you can’t sell when panic strikes.
Many of America’s most iconic blue-chip stocks are down 50% or more from their all-time highs.
These include giants like Facebook parent Meta (META), Disney (DIS), Nike (NKE), and Netflix (NFLX).
In other words, you can buy these stocks for “half off.” In some cases, the discounts are even steeper.
It’s an opportunity you shouldn’t pass up.
Over the short term, their share prices could drop further. But over the next decade, the chances of you not profiting are extremely low.
As Kirby put it…
As a money manager, I have frequently looked at an investment decision that I felt had a high probability of success on a three-year horizon, but about which I had many doubts on a six-month time horizon.
So if you have 10 years or more before you retire, now’s a great time to fill your coffee can.
You can buy stocks in the world’s greatest businesses for steep discounts. And these discounts won’t last forever.
Editor, The Daily Cut