I recently came across a fascinating paper by Hendrik Bessembinder titled “Which U.S. Stocks Generated the Highest Long-Term Returns?” The research is based on nearly 100 years of stock market history, and it delivers some surprising and important lessons for retirees. I recently came across a fascinating paper by Hendrik Bessembinder titled “Which U.S. Stocks Generated the Highest Long-Term Returns?” The research is based on nearly 100 years of stock market history, and it delivers some surprising and important lessons for retirees.
Articles, Links & Resources:
Which US Stocks Generated The Highest Lifetime Returns? – Bessembinder
Investing In Retirement – New eBook by Jason Parker
Portfolio Visualizer – Backtest Historical Returns
First Republic Bank – Share Price History
First Republic Bank – Biggest Bank Failure Since 2008
Transcript:
451 The risk you’re not getting paid for
Announcer: Welcome back America to Sound Retirement Radio, where we bring you concepts, ideas, and strategies designed to help you achieve clarity, confidence, and freedom as you prepare for and transition through retirement. And now here is your host, Jason Parker,
Jason Parker: America. So glad that you are tuning into episode number 451.
The risk you’re not getting paid for. Today, we’re diving into the concept of risk, specifically the kind of risk that you’re not getting paid for. I recently came across a fascinating paper by Hendrick Bess and Binder titled, which US Stocks generated the highest Long-Term Returns. The research is based on nearly 100 years of stock market history, and it delivers some surprising and important lessons for retirees.
We’re also gonna take a real world look at two companies. One you probably know well, Smuckers, and one that made the headlines for all the wrong reasons. First Republic Bank. We’re gonna talk about total returns, dividends, and what bests and binder’s paper shows us about why diversification matters more than ever.
But before we get into today’s episode, let’s start out by renewing our mind. This is a verse from Second Peter, chapter one, verse three. His divine power has given us everything we need for a godly life. Through our knowledge of him who called us by his own glory and goodness. And then here’s something fun for the grandkids.
Why is everyone so tired on April 1st? Because they just finished a 31 day march. How excited was the gardener about Spring? I. So excited that he wet his plants.
As a reminder, articles, links, resources, and the transcript of today’s show can be found at soundretirementplanning.com. Just click on episode number 451. So let’s start with this research from the Bess and Binder study. It’s a new report that came out in July of 2024, and it was updated in November. It examined every US common stock listed between 1926 and 2023, over 29,000 companies.
And here is the shocking takeaway. More than half of all US stocks, 51.6% produced negative lifetime returns. Lemme say that again. More than half of all US stocks produced negative lifetime returns, and these weren’t penny stocks or scams. Many were profitable growing companies, but as a long-term investor, if you happen to pick one of these underperformers and held on, you lost money.
Meanwhile, broad-based indexes like the s and p 500, delivered excellent long-term returns. Why? Because a small handful of companies drove most of the wealth creation. This tells us that success in investing isn’t just about picking a good company. In fact, many good companies still underperform. The real advantage comes from owning the entire market because while you do end up holding some of the losers, the long-term winners more than make up for them.
That’s the power of broad diversification. It ensures you capture the outsized gains from the few companies that drive most of the market’s long-term growth. So let’s put this theory into practice using two real world examples. First, Smuckers, more than 10 years ago, I subscribed to a newsletter touting the benefits of dividend paying stocks, and one of the recommendations was the JM Smucker company.
I like Smuckers because it’s a rock solid brand. Founded in Ohio, which is where I’m from back in 1897. They make peanut butter jelly coffee, staples of the American pantry. They’ve been profitable. They generate strong cash flow, and they’ve increased their dividend for 22 consecutive years. It’s a large cap company and part of the s and p 500.
On January 2nd, 2015, Smucker’s stock traded at $100 and 48 cents. Today it’s around $111 and 20 cents. That’s a modest 10% price gain over a full decade. And then with dividends over that time, you had a compounded annual growth rate of approximately 3.88%. Now compare that to the s and p 500, which returned nearly 12% per year over the same time period.
Smuckers is a good company, but it turned out to be a poor investment compared to the index, and that’s an example of uncompensated risk. You took on more risk by owning one company and got a lower return than you would have earned if you had just owned the s and p 500 index. Let’s take it a step further with an even more extreme example, first Republic Bank at its peak.
First Republic was a well-respected regional bank with a strong reputation, wealthy clientele, and a history of prudent lending practices. The stock price climbed from around $27 per share to over $200 a share at its height, but in 2023 during the regional banking crisis. It all came crashing down despite decades of growth.
First Republic stock went to zero. The company was seized by regulators and sold. If you had owned that stock, even if you believed in the brand or the balance sheet, it became worthless, and that’s the ultimate example of uncompensated risk. When you own a single stock, you’re taking on idiosyncratic risk.
The kind tied to one company’s future. It’s like putting all of your eggs in one basket. If you drop that basket, all the eggs break. But if you’ve spread your eggs across many baskets, dropping one doesn’t ruin the rest with a single company, anything could go wrong. Will management make the right decisions?
Will competitors eat into profits? Will regulations change? Could there be a scandal, a cyber attack, or a financial crisis? These are all risks that affect just one company and the risks that you’re not always rewarded for taking. With Smuckers, you got a return, but compared to the s and p 500, it was disappointing.
With First Republic Bank, you got wiped out. Neither outcome rewarded you enough to justify the risk you took. Diversified market risk, on the other hand, is compensated risk. You’re rewarded for owning the whole market, not just betting on one company’s fate. Now, to be fair, the two examples I shared, Smucker’s and First Republic are companies that underperformed the index.
You may have owned a, a stock that outperformed, but remember, Bess and Binder’s study. Over the last 100 years, less than half of all US stocks generated a positive lifetime return, and only a relatively small number of companies drove the vast majority of total market gains. So yes, it’s possible to pick a winner.
But the odds aren’t in your favor. It’s basically a coin flip. Whether the company ends up being profitable, investment over the long term, and being able to consistently pick the right companies. That requires not only skill, but also a good amount of luck. If you’re retired or getting close, you don’t have time to bet on the wrong company and wait it out.
You need a portfolio that grows to stay ahead of inflation, generates income to support your lifestyle, and protects against catastrophic losses. And that’s why diversification is an essential strategy for managing risk in retirement. Hope is not a strategy, and retirement is no time for speculation. I.
And to keep the regulators happy. Diversification does not guarantee positive outcomes or eliminate the risk of loss. At Parker Financial, we help retirees create investment strategies that prioritize compensated risk, smart, evidence-based, diversified investing that avoids unnecessary exposure to any one company sector or idea.
And to help you better understand these concepts, I’ve written a brand new ebook called Investing in Retirement. It’s free and available to download@retirementbudgetcalculator.com. Just click on the invest button, which is in the upper right corner of the website to get your free copy, and there’s no obligation whether you’re looking to model your spending, simulate different retirement scenarios, or understand how inflation and market returns might impact your future.
This resource, along with the retirement budget calculator can help you make smarter decisions with confidence. If you’re nearing retirement and you have an IRA or a 401k. You’re not sure if your portfolio is truly aligned with your goals. If it’s properly diversified or optimized to last, it might be time to get a second set of eyes on what you’re doing and we’d love to help.
You can schedule a meeting with our team@parkerfinancial.net. I. Or explore the retirement budget calculator@retirementbudgetcalculator.com. Either way, let’s make retirement remarkable with clarity, confidence, and a plan grounded in research and real world experience so that you can enjoy the freedom that you’ve earned.
And remember, just because a stock has strong fundamentals and it’s paying a dividend, no matter how familiar it feels. It doesn’t mean it’s right for the retirement phase of life.
Announcer: Thank you for tuning in to Sound Retirement Radio. For articles, links and resources from today’s show, visit sound retirement planning.com.
If you enjoy the podcast, share it with a friend and give us a. Five star review. Ready to kickstart your retirement planning. Head over to retirement budget calculator.com. Need assistance with investment management, explore our services@parkerfinancial.net. Information and opinions expressed here are believed to be accurate and complete for general information only.
It should not be construed as specific tax, legal, or financial advice for any individual and does not constitute a solicitation. For any securities or insurance products, please consult with your financial professional before taking action on anything discussed in this program. Parker Financial, its representatives or its affiliates have no liability for investment decisions or other actions taken or made by you based on the information provided in this program.
All insurance related discussions are subject to the claims paying ability of the company. Investing involves risk. Jason Parker is the president of Parker Financial LLC, an independent fee-based wealth management firm. Located at 9 2 3 0 Bayshore Drive Northwest Suite 2 0 1, Silverdale, Washington. For additional information, call 3 6 0 3 3 7 2 7 0 1 or visit us online@soundretirementplanning.com.
