No Asset Is Protected—However Some Lose Much less

There’s an uncomfortable reality each investor should confront: your capital is rarely actually protected. The dual threats to long-term wealth are inflation and inventory market crashes. Preserving and rising capital requires balancing these two main dangers.

The Million Greenback Query

Think about receiving $1 million at the moment, together with the duty to safeguard and develop it over the following decade. Your main purpose: protect its actual worth — and ideally enhance it. As a cautious steward, how would you allocate this capital?

At first look, the reply appears easy: hold it protected, maybe in a financial savings account. However on nearer inspection, the selection is way from easy. Historical past exhibits that even essentially the most secure-seeming choices can carry hidden dangers.

Capital at Threat, All the time

To grasp this, let’s flip to historical past. Utilizing US monetary knowledge from January 1900 to December 2024, we discover that inflation averaged 3.0% per 12 months.[1] This implies hiding money below the mattress would have been disastrous: over a century, one greenback eroded to lower than 4 cents — a >96% loss in buying energy. Inflation will eat it slowly and silently.

Put it in a financial savings account? That offers you curiosity and likewise feels safer. Over the previous century, financial savings accounts in international locations like america and different western international locations have on common stored tempo with inflation. The typical short-term saving price, proxied by short-term US T-bills, averaged 3.0% per 12 months.

Averages masks important losses, nonetheless. Within the Forties and early Fifties, throughout a interval of monetary repression, rates of interest have been held artificially low whereas costs crept greater. This was executed to convey down the debt of the governments that have been closely indebted after World Battle II. Savers witnessed an actual loss in buying energy of greater than 40%.

Exhibit 1 serves as a wake-up name to savers. It exhibits the peak-to-bottom actual return of US T-bills. It has a most lookback window of 10 years (in any other case restoration could be even slower). It is a image which is counterintuitive. Your financial savings aren’t protected when you’ve got a 10-year horizon and proper for inflation.

Exhibit 1. Actual Drawdowns US T-Payments

Sources: McQuarrie (2024) and Robeco

As of 2025, a brand new period of monetary repression seems to be underway. The inflation spike of 2022, mixed with rates of interest lagging behind, brought about an actual loss in worth of practically 20%. Over time, this damaging actual price has compounded. Savers are nonetheless down about 10% relative to 2010 ranges, and with actual rates of interest close to zero in 2025, catching up shall be troublesome.

The Phantasm of Security

These episodes underscore a elementary reality: even belongings that really feel protected — like financial savings accounts — can expose buyers to actual, lasting losses. That brings us to a broader level: capital is all the time in danger. Whether or not you select to avoid wasting or make investments, you’re betting. Inflation and market volatility are ever-present forces.

Over longer horizons, the road between saving and investing begins to blur. What feels steady within the quick time period might fail to protect worth in the long run.

Authorities Bonds: Safer—However Protected Sufficient?

For a lot of buyers, the following step past saving is authorities bonds. They usually provide about 1% extra yield than a financial savings account and are sometimes seen as a safer various to equities. However protected from what?

Bond buyers have confronted difficult durations since 1900. After World Battle I, a postwar financial increase led to rising inflation, which eroded the buying energy of presidency bonds issued through the conflict. These so-called Liberty Bonds got here with low mounted rates of interest, which rapidly grew to become unattractive within the new inflationary setting. The Federal Reserve responded by elevating charges, and bond costs fell sharply, amplifying losses through the recession and deflation that adopted within the early Twenties.

An analogous sample adopted World Battle II: artificially low rates of interest and a protracted bond bear market. The expertise of the Nineteen Seventies is much more acquainted. Throughout that “bond winter,” bondholders misplaced practically 50% in actual phrases. That’s not simply volatility, that’s wealth destruction. Bear in mind: it takes a 100% achieve to get well from a 50% loss.

As of 2025, buyers are as soon as once more in a “bond winter,” dealing with a cumulative actual lack of round 30%, pushed by the excessive inflation of the early 2020s and the next rise in bond yields.

Exhibit 2. Actual Drawdowns US Bonds

Sources: McQuarrie (2024) and Robeco

Shares: Lengthy-Time period Acquire, Lengthy-Time period Ache

An investor is all the time both at an all-time excessive or in a drawdown. Most inventory market buyers are conscious of this. Shares can actually disappoint in each the short-term and the long-run. The Nice Despair worn out practically -80% of actual wealth invested within the US inventory market. Even after a robust restoration, it took a few years, even a long time, for many buyers to completely heal. Not each dip is adopted by a swift restoration. Inflation, typically ignored, can additional erode actual returns, even when inventory markets go up in nominal phrases. 

Exhibit 3 exhibits that historical past is stuffed with market corrections of -20% or extra. The 21^st century alone had three drawdowns of greater than -30% in actual phrases. These large and frequent losses are a function of inventory markets. As a result of losses are likely to happen all of a sudden, most buyers are properly conscious of the short-term dangers.

Exhibit 3. Actual Drawdowns US Inventory Market

Sources: McQuarrie (2024) and Robeco

Over the long-term equities ship returns greater than bonds. But over multi-decade horizons, equities can nonetheless disappoint. Latest analysis by Edward McQuarrie means that even within the nineteenth century, shares didn’t persistently outperform bonds, difficult the concept that equities are all the time the most secure long-term funding.[2]

Evaluating Asset Lessons

We study actual losses — the decline in buying energy — throughout 4 key asset courses: financial savings accounts, authorities bonds, gold, and equities. We take a look at each short-term (one-year) and long-term (10-year) threat utilizing the conditional worth in danger (CVar) — a measure of common losses within the worst durations — also referred to as the primary decrease partial second (LPM1). This measures the anticipated loss within the worst durations, particularly these beneath the inflation price.

Financial savings accounts, whereas typically seen as protected, can quietly erode wealth over time. The typical actual loss trying again 10 years (CVar) was -17%. Over shorter durations, the ache is much less: a typical lack of -2%, with a most one-year drawdown of -9%. This highlights a key paradox: financial savings are comparatively protected within the quick run, however are removed from safe over longer horizons.

Bonds provided considerably higher long-term efficiency, however with deeper short-term drawdowns. Their worst 10-year loss was -49%, barely worse than financial savings, although the typical long-term loss was smaller at -10%. Over one-year durations, losses ranged from -4% anticipated to -25% max.

Gold, typically seen as a protected haven, is unstable in each the quick and future. It carried out particularly properly within the Nineteen Seventies and extra lately outpaced bonds within the inflationary 2020s. But, gold stays dangerous. Its worst one-year and 10-year actual losses have been -44% and -68%, respectively, with excessive common drawdowns as properly, even greater than shares. Regardless of this, it could possibly nonetheless function a helpful diversifier — notably when mixed with regular shares.[3]

Equities ship the best long-term returns, but additionally the best drawdowns. The typical loss was -15%, and even in a single dangerous 12 months, the anticipated actual drawdown was -7%, with a most of -62%. Lengthy-term buyers are rewarded, however provided that they’ll endure extreme interim declines.

Exhibit 4 —Threat and Return of Asset Lessons

Sources: McQuarrie (2024) and Robeco

These long-term numbers are not often proven — and for good motive. Most empirical analysis focuses on short-term, nominal returns, which supply extra statistical energy however assume buyers solely care about month-to-month volatility. When seen by way of an actual, long-term lens, a really completely different image emerges. Money and bonds might seem steady within the quick run, however they carry substantial long-term threat as soon as the main focus shifts to inflation and long run potential losses.

The takeaway is straightforward: in the long term, all investments are dangerous. Even financial savings. What issues most isn’t whether or not you face threat, however the way you handle this threat.

Exhibit 5 — Abstract Threat Ranges by Asset Class

Regular Shares Supply a Center Means

You’ll be able to’t conceal from threat. After you have capital, you’re uncovered — whether or not you save or make investments. The excellent news is that threat may be decreased by way of diversification throughout asset courses: bonds, equities, financial savings, and even gold. This is among the few “free lunches” in finance, lowering threat with out sacrificing return. But even in a basic 60/40 portfolio, a lot of the threat nonetheless comes from equities.

There’s a higher method: scale back inventory market threat by specializing in steady corporations, typically referred to as “widow and orphan shares.” These companies are likely to ship constant returns, very similar to bonds, however with an necessary benefit: their earnings can develop with inflation.

I’ve studied and written extensively on this funding model in educational papers and within the e book Excessive Returns from Low Threat. These low-volatility shares might lag throughout robust bull markets, however they have a tendency to carry up higher throughout downturns. Within the quick run, they actually aren’t as “protected” as bonds or financial savings, however they’re much less dangerous than the broad fairness market. In the long term, they provide strong capital safety, notably in environments characterised by stagflation just like the Nineteen Seventies, when dangerous shares struggled. The drawdowns of regular shares are much less extreme and are typically shorter when investing within the full inventory market which additionally contains the riskiest shares. Historic deep knowledge for this technique exists, and on this weblog, we current outcomes ranging from 1900. [4]

Traditionally, regular shares have delivered spectacular outcomes: an actual return above 10% CAGR from 1900 to 2025.¹ After all, this determine advantages from the distinctive historic efficiency of US equities and doesn’t account for taxes or transaction prices. Trying forward, returns are more likely to be decrease. Multiples have expanded, driving down anticipated returns. With US debt/GDP ranges close to post-war highs (corresponding to 1918 and 1945) and fairness valuations close to all-time highs, forward-looking actual returns will probably be extra modest. (See weblog: “When the Fairness Premium Fades, Alpha Shines.”)

Nonetheless, the relative efficiency of regular shares stays compelling.

Exhibit 6: Threat and Return of Portfolios

Sources: McQuarrie (2024) and Robeco

Apparently, Exhibit 6 makes a robust case for each diversification and regular shares. A portfolio absolutely allotted to regular shares reveals comparable anticipated losses as a conventional 60/40 portfolio. But, being absolutely invested in shares means tail threat which is clear for the reason that most actual losses are greater for regular shares than for the 60/40 combine.

Subsequently, a gentle 60/40 portfolio deserves consideration. This portfolio replaces equities with defensive equities and has decrease draw back threat, corresponding to the ultra-conservative everlasting portfolio which invests 25% in shares, bonds, financial savings and gold, however with meaningfully greater returns.[5]

The numbers communicate for themselves: changing (a part of) the fairness portfolio with a defensive fairness technique helps to scale back draw back threat. It’s so efficient that it presents just about comparable draw back safety because the ‘extremely conservative’ everlasting portfolio.

Nonetheless, no technique absolutely eliminates drawdowns. At any given time, buyers face a median drawdown of no less than –3% on a one-year foundation (–2% for financial savings), and –6% over a 10-year horizon (–9% for financial savings). There is no such thing as a risk-free possibility as soon as your horizon is lengthy and open-ended.

The Regular 60/40 Portfolio presents a compelling mix of inflation safety and inventory market resilience. Whereas already strong, it serves as a robust start line open to considerate refinements. For example, including 5% to 10% in gold or commodities, as within the Everlasting Portfolio, might additional scale back drawdowns throughout inflationary durations such because the Twenties, Nineteen Seventies, and 2020s. Extra enhancements —  like momentum, or worth alerts — can increase long-term returns by way of alpha.

The optimum combine in the end will depend on an investor’s threat urge for food and time horizon, making it adaptable to a spread of preferences. However the first-order impact is obvious: inventory market threat is the biggest supply of long-term portfolio losses — and it may be decreased with an allocation to bonds. Nevertheless, one other efficient approach to decrease threat is by changing a portion of equities with regular shares. This method preserves long-term returns whereas additionally permitting for a decrease bond allocation, which helps scale back threat in an inflationary setting.

The Most secure Transfer: Lose Much less

Even the most secure funding will lose worth sooner or later. No portfolio is resistant to actual losses. However some portfolios lose much less, and shedding much less offers buyers the time and confidence to remain invested.

One key protection is diversification. Placing all of your capital in a financial savings account will increase long-term inflation threat. Placing all the things in equities will increase each short- and long-term drawdowns.

A gradual portfolio — one that features a substantial allocation to low-volatility, conservative equities — presents a compelling mixture of inflation safety, market stability, and long-term return. The info present that such portfolios scale back actual drawdowns considerably in comparison with each an all-equity allocation and a conventional 60/40 combine, with out sacrificing long-term efficiency.

Now think about once more being entrusted with $1 million to protect and develop over the following decade. You now acknowledge that it’s not a simple activity however a balancing act. As an alternative of 100% saving, historical past suggests the very best safety comes from diversified investing, together with a significant allocation to regular shares.

Key Takeaways

• Over lengthy horizons, no asset is really protected — not even money.
• Historic knowledge present regular shares mix resilience with enticing returns.
• Diversifying throughout higher — not simply extra — belongings reduces drawdowns.

Pim van Vliet, PhD, is the writer of Excessive Returns from Low Threat: A Exceptional Inventory Market Paradox, with Jan de Koning.

Hyperlink to analysis papers by Pim van Vliet.

References

Baltussen, G., Swinkels, L., & van Vliet, P. (2023a). “Investing in deflation, inflation, and stagflation regimes,” Monetary Analysts Journal, 79(3), 5–32.

Baltussen, G., van Vliet, B., & Van Vliet, P. (2023b). The cross-section of inventory returns earlier than CRSP. Out there at SSRN 3969743.

McQuarrie, E. F. (2024a). Shares for the long term? Generally sure, typically no. Monetary Analysts Journal, 80(1), 12-28.

McQuarrie, E.F. (2024b) Introducing a New Month-to-month Collection of US Authorities Bond Returns 1793–2023. Working Paper 4899187, SSRN

van Vliet, Pim, and Harald Lohre. “The Golden Rule of Investing.” The Journal of Various Investments (2023).

CFA Institute Enterprising Investor. Could 2025. When the Fairness Premium Fades, Alpha Shines. Hyperlink

[1] We use 30-day T-bills (90-day previous to 1926) as proxy for saving accounts, Authorities Bonds, Inventory Market and Conservative Shares. Sources are from MacQuarrie and Robeco.

[2] See 2024 examine by Edward McQuarrie, E. F. (2024). Shares for the long term? Generally sure, typically no. Monetary Analysts Journal

[3] See: The Golden Rule of Investing by Pim van Vliet, Harald Lohre :: SSRN. Whereas buyers can maintain bodily bullion, gold ETFs provide a extra sensible answer.

[4] The Conservative Method knowledge are used and from 1929 may be downloaded at paradoxinvesting.com/knowledge. Information going again to 1900 is described within the 2023 examine ‘The cross-section of inventory returns earlier than CRSP.”

[5] Popularized by Harry Browne in Fail-Protected Investing: Lifelong Monetary Safety, 1981. The Everlasting Portfolio allocates equally to shares, bonds, money, and gold to hedge towards inflation, deflation, recession, and market threat.