Why We Own Equities: A Long-Term Perspective.

When it comes to building long-term wealth, equities have historically been the most powerful tool available. Over time, stocks have consistently outperformed bonds, and I prefer to be an owner of businesses rather than a lender to them. 

The most effective (though not the only) way to invest in equities is through a few, low-cost, broadly diversified, portfolio of index mutual funds or ETFs. Diversification is your ally—it protects your financial plan by spreading risk, so you're not overly exposed to any single company or sector. 

Low costs matter too. The less you pay in fees, the more of your money stays invested and continues to compound over time.  Even small fees, compounded over time, can be a huge drag on your portfolio. 

Investing success doesn’t require complexity. Patience, simplicity, planning, and a tolerance for uncertainty are the real keys. Rather than focusing on the day-to-day price of an investment, it’s better to focus on its long-term earnings potential. 

Over the long term, equities have a track record of growing operating earnings faster than inflation. And those earnings—what’s left after expenses, taxes, and interest—are the fuel companies use to reinvest, pay dividends, or buy back shares. 

Take the S&P 500 as an example. One share on March 31, 2005, had a price of $1,180.59 and earnings of $16.95 per share. Fast forward to March 31, 2025: that same share of the index was priced at $5,881.63, with earnings of $57.69, per share. Over 20 years, that’s a 375% increase in price and a 237% increase in earnings—despite two recessions along the way.1 

As Warren Buffett wrote in his 2013 annual letter, a simple portfolio of 90% S&P 500 and 10% short term government bonds is a solid choice for many long-term investors. He also offered timeless advice for long-term investing [paraphrased]:2 

1. Keep it simple. Don’t chase quick profits. 

2. Focus on an asset’s ability to produce income, not just its price movement. 

3. Speculation isn’t investing—it’s guessing. 

4. Ignore daily market noise. Watch the playing field, not the scoreboard. 

5. Don’t waste time on market predictions. 

6. Base your investment decisions on long-term fundamentals, not short-term forecasts. 

In short, focus on the long-term earnings potential of an investment, stay patient, and trust in power of owning great businesses. 

Sources: 

1) S&P Dow Jones Indices, S&P 500 Earnings Spreadsheet – Link 

2) Buffett, W. (2013). Berkshire Hathaway 2013 Annual Letter. Retrieved from Link