The Long-Term Safety of Stocks May Be Overstated: Here's Why

The University of Missouri’s Robert J. Trulaske, Sr. College of Business would like to thank Charles Jones Russell for helping to make research like this possible. For generations, financial advisors have assured investors that stocks are a safe bet over the long haul.

“Stay the course,” they say. “Time in the market beats timing the market.” But what if that advice, rooted largely in the U.S. experience, gives investors a false sense of security? New research from Michael O’Doherty, the Charles Jones Russell Distinguished Professor at the University of Missouri’s Robert J. Trulaske, Sr. College of Business, challenges the long-held assumption that equities are low-risk over extended horizons. By analyzing nearly 180 years of monthly stock returns from 39 developed countries, O’Doherty and his co-authors paint a far more nuanced, and sobering, picture of long-term equity investing.

WHY THE U.S. ISN’T THE WHOLE STORY
Conventional wisdom is built on a narrow base: historical U.S. data. The American stock market, after all, has delivered enviable returns even through wars, recessions and crises. But that performance may not be replicable elsewhere, or in the future. O’Doherty’s study incorporates more than 2,600 years’ worth of investment histories across developed markets, capturing events like market shutdowns, hyperinflation and geopolitical upheaval that traditional U.S. centric studies omit. Countries such as Japan, Germany and Czechoslovakia experienced extended market stagnation or even permanent closures, realities that long-term investors ignore at their peril.

THREE KEY INSIGHTS FOR INVESTORS

1. Stocks Are Not Safe Over the Long Term
Using U.S. data alone, the probability of losing purchasing power over a 30-year horizon is just 1.2%. But across the broader international sample, that risk climbs to 12.1%. In the worst 1% of all scenarios, a dollar invested shrinks to $0.14 or less after inflation. Real-world cases bear this out: Japanese equities returned -21% in real terms between 1990 and 2019. The outcome would be considered highly unlikely under U.S.-based assumptions but is well within the range of plausible global experiences.

2. Extremes Are More Common Than Expected
The range of possible long-term outcomes is staggering. In simulations, the 95th percentile of 30-year results yields over $23 from a $1 investment, while the 5th percentile drops to just $0.47. These tails, both positive and negative, are fatter than most models assume, underscoring the need for careful risk management.

3. Investment Fees Matter
Even small differences in fees can significantly raise the odds of long- term loss. A fund with a 0.04% annual expense ratio sees a 12.3% loss probability over 30 years. Raise fees to 1.11%, and the chance of losing ground rises to 17.5%. For retirement investors, compounding fees can quietly erode even otherwise solid portfolios.

IMPLICATIONS FOR POLICY AND PRACTICE

Update Policy Design: Retirement systems, target-date funds and fiduciary frameworks often assume equity safety over time. This research suggests that such models should better account for rare but severe downside scenarios, especially as retirement planning increasingly depends on long-horizon forecasts.

Base Expectations on Global Data: Forecasts rooted in a single country’s exceptional past are at risk of being dangerously optimistic. Instead, investors and policymakers should anchor return expectations in broader, less biased datasets.

A REALITY CHECK FOR LONG-TERM OPTIMISM

The research upends the widely accepted belief that equities are a sure bet over time. While stocks remain a cornerstone of long-term strategy, their risks, particularly on a global scale, are more significant than most investors realize. O’Doherty, alongside co-authors Aizhan Anarkulova and Scott Cederburg, published these findings in the “Journal of Financial Economics” under the title, “Stocks for the Long Run? Evidence from a Broad Sample of Developed Markets.” The message is clear: Sound investing demands broader perspective, lower fees, and greater humility in the face of uncertainty.

Mizzou’s Robert J. Trulaske, Sr. College of Business prepares students for success as global citizens, business leaders, scholars, innovators and entrepreneurs by providing access to transformative technologies, offering experience-centered learning opportunities and fostering an entrepreneurial mindset.