Why Equities Win Long Term (And What the Data Actually Shows)

0:00 going to talk about equities. And here's something that might make you uncomfortable is technology stocks have returned over 20% for the last 15 years. Energy stocks 5 and a half%. Same time period, same stock market. One made you rich while one was basically matching your savings account. So the question is why? Why do some sectors crush it while others get absolutely destroyed? And more importantly, why even care? Should you just buy the S&P 500 and call it a day? I'm Brian, CPA over 15 years in finance. I'm going to break down every major asset class, stocks, bonds, real estate, crypto, commodities, all of it, and show you the actual historical returns and explain why they work the way they do and look the way they do.

0:40 Because when you understand the why, you can stop guessing and start making actual informed decisions. This is part one. We're covering equities, sectors, countries, and all those smart beta strategies people keep trying to sell you. So, before we dive into the data on why, I want to explain why I'm building the series. Working with people on their finances, I've noticed something that most people have no idea what they actually own or why they own it. They bought some ETF because some co-orker mentioned it or they heard diversification is good, so they added some bonds. They have no real understanding of how any of it fits together. And when you don't understand the why behind what you own, you make bad decisions. You panic sell when things drop. You chase whatever performed well last year. where you buy complicated products you don't need. So, I'm breaking down every major asset class, stocks, bonds, real estate, commodities, crypto alternatives, not just the buy this ETF, the actual mechanics, why it works, why it doesn't sometimes, and how it all fits together in the bigger picture. That way, you can build something that actually makes sense for your situation instead of just trying to copy someone else's portfolio and hope it works out. We're starting with stocks because they're the foundation to me of almost every long-term portfolio. And there's a reason for that. Why do the stocks work?

1:56 First, let me establish something important that stocks have crushed every other asset class over the long term. And it's not even close. $100 invested in the S&P 500 in 1928, it's over a million dollars today. T bills or treasury bills, 2500 bucks. It's not a typo. Stocks turned that into real wealth. cash turned it into enough to maybe buy a nice TV. And what most people don't understand is why do stocks do this over the long run. It's not magic. Not stonss go up only. It's actually really simple. When you buy a stock, you own a piece of the business.

2:30 That business makes money. It can do two things with that money. Pay you a dividend or reinvest it to make more money the next year. There's some other fancy stuff, but those are the main two things. That reinvestment, it's compounding. The business literally gets bigger. Your slice, it gets more valuable. Bonds don't do that. Gold doesn't do that. Your house doesn't wake up every morning and figure out how to become a bigger house. Stocks compound. That's the whole game. Now, businesses, stocks are great, but not all stocks or businesses are created equal. So, let me show you the 15 years of returns for each sector. And I promise you some of these are going to surprise you. So, looking at the spread, tech at 20%, energy at five. Here's where it gets interesting is let me talk about why.

3:08 Technology 20% returns. This is your Microsoft, Nvidia, Apple. These companies found ways to grow revenue year after year. Cloud computing, smartphones, now AI. They're not just maintaining. They're constantly finding new things to sell you or grow. Your grandma has an iPhone. That's growth. Health care is 13%. Here's the thing about healthcare. People get old. That's just the reality. Aging demographics are a structural tailwind for this sector. You can't not buy your medication. And a fun stat is healthcare has never been the worst performing sector over any three-year period ever. It's boring, but it is consistent. Consumer staples 10%.

3:49 You've got your classic toothpaste, laundry detergent, lowest volatility of any sector in 2008 when markets dropped 37%. Staples dropped 14%. The trade-off is you're not going to get rich here, but you're also not going to feel that pain in a big drop. And then there's energy at 5.45. Let me tell you what happened to energy is in 2020 it dropped 33%. In 2022 it went up 65%. This sector will cause whiplash. It's completely tied to oil prices which are basically controlled by geopolitical and OPEC meetings. The reason it has the worst long-term returns despite being a real asset is because it's a mature industry with no real growth. You can't sell more oil to someone who already has a car.

4:33 The sector has 29% volatility, almost double the market average for returns that barely beat inflation. So, when your uncle tells you to buy oil stocks because it'll always need energy, it's technically true, but doesn't mean it's a good investment. The bigger lesson to me from all this is no one industry wins forever. In the 2000s, energy crushed tech. Tech was dead water. Before that, different winners, the sectors at the top rotate over time. The one thing that is consistent is businesses innovate.

5:02 They find new problems to solve, new markets to enter, new ways to grow. The specific winners change, but the overall engine of business's growth keeps compounding. That's why broad diversification works. You don't have to guess which industry wins next. You own them all, and the innovation happens inside your portfolio. On geographic diversification, a little bit controversial, but international stocks, here's what actually happened since 2010. US stocks are up about 350%. International developed up about 85% emerging markets about 45%. The US has outperformed international stock markets by over 500 percentage points. That's a lot. If you diversified internationally over the last 15 years, sure, you left money on the table. So, should you go allin on America? The thing is, international stocks are now trading at a 3540% discount to US stocks, the widest gap in decades. Vanguard who literally makes money selling you index funds says there's a 70% probability that international stocks outperform over the next decade. This is not advice but why is this? It's a few reason. One is US outperformance was driven by tech.

6:12 Seven companies the mag seven explained 22% of that outperformance which is not diversification that's concentration risk. Two would be the dollar got 39% stronger. When the dollar is strong, your international investments look worse in Canadian or USD terms, but the currencies don't go in one direction forever. Three would be Europe is actually doing stuff now. So, Germany just announced a trillion euro infrastructure plan. Japan's finally making companies return cash back to shareholders. Here's my take is I don't know if international will outperform.

6:44 Nobody does. Don't listen to someone who promises that. But when something is 40% cheaper and has the same earnings quality, that's usually called a good deal. For emerging markets, higher growth, higher volatility. China can decide to regulate an entire industry out of existence on a random Tuesday. So factor that into your risk tolerance. The other thing too I want to hit on is talking about smart beta or factor investing. And this is where it can get nerdy for sure, but stay with me.

7:13 Academics found that certain types of stocks consistently beat the market over long periods. Value cheap stocks that beat expensive stocks 4 to 5% premium historically. Small cap small companies beat big companies 2 to 3% premium. Momentum winners keep winning 6 to 8% premium the biggest one. Quality which is profitable companies beat unprofitable ones 3 to 4% premium. And it can sound amazing just by the factors. Beat the market retire early. Here's the problem with that though is value premium basically disappeared from 2017 to 2020. Small cap value lost 13%.

7:49 While small cap growth gained 71% four years of getting destroyed. So if you're not willing to unperform for potentially a decade while waiting for your factor to work, you're going to panic sell at the worst time or change strategies. The one that's been the most consistent is momentum. And value spreads right now are at historic wides which historically predict strong value returns going forward. My take is just buy the broad index. If you want to tilt, keep it small, maybe 10 to 20% of your portfolio, and be prepared to look dumb for many years at a time. This is not advice. So, this is part one on equities. Here's what we covered is stocks beat everything long term because businesses compound. That's the engine.

8:29 Industries rotate, but innovation is constant. And that's why broad diversification works. International is cheap right now, but requires patience. Factor investing works until it doesn't. you need to survive the part that doesn't. Bigger point with this is when you understand the why something works and and can actually stick with a plan when things get hard. You're not just going to go hopping around portfolio options, you understand the mechanics. Next video I'm covering bonds and real estate. We're going to talk about why 20 2022 broke the 6040 portfolio and why the smartest investors in the world are totally fine earning 6% return. This is part of an ongoing series I'm going to be building out over time. Subscribe if you actually want to understand what you own and why.