Stocks Outperform Inflation Over Long Term, Data Shows
Translated & summarized from Maariv by baba
Inflation can erode the value of money held in bank deposits, with stocks historically outperforming inflation over the long term. Data from 126 years shows a single dollar invested in U.S. stocks in 1900 grew to over $124,000 by 2025, significantly outpacing bonds and cash. While short-term stock investments can lag inflation, holding stocks for twenty years or more historically guarantees real gains above the cost of living.
The story in 5 lines · by baba
- Inflation erodes the purchasing power of money held in bank deposits and bonds.
- Stocks have historically provided the best long-term returns, outpacing inflation significantly.
- A $1 investment in U.S. stocks in 1900 grew to over $124,000 by 2025.
- Holding stocks for twenty years or more historically guarantees real gains above inflation.
- The TA-125 index in Israel has increased purchasing power in 96% of ten-year periods.
Money held in bank deposits or bonds may seem secure, but inflation can silently erode its value, according to financial planner Daniel Shevkes. A deposit of 100 shekels earning 3% interest would lose purchasing power if inflation reached 4%, meaning less can be bought with the same amount of money.
To combat inflation, holding real assets is essential, with stocks identified as a key real asset. Historical data from the DMS database, spanning 126 years and numerous countries from 1900 to the present, indicates that stocks have been the leading investment vehicle for preserving and increasing purchasing power. A single dollar invested in U.S. stocks in 1900 would have grown to an estimated $124,854 by the end of 2025, compared to just $268 in government bonds and $67 in cash deposits. During this period, the price index rose 38-fold.
While cash barely kept pace with inflation, yielding about half a percent annually, the stock market provided an average real return of 6.6% per year above the cost of living. This trend held true globally, even in countries that experienced world wars and hyperinflation, due to the underlying physical assets of companies. However, stocks are not a short-term solution; their effectiveness in preserving purchasing power is highly dependent on the investment horizon.
Analysis of rolling ten-year periods shows that investors holding stocks for a single year lagged inflation in about a quarter of cases. This probability dropped significantly with longer holding periods. Over ten years, the chance of preserving purchasing power rose to around 90%, and over twenty years, the historical probability of a real loss in broad stock indices fell to zero. In Israel, the TA-125 index increased purchasing power in 96% of ten-year periods, yielding nearly 6% annually above inflation.
Gold, often seen as a safe haven, has not historically generated consistent returns above inflation, except for brief periods. Stocks, conversely, generate profits and pay dividends that can be reinvested, fueling growth. The greatest long-term risk to money is not stock market volatility but the certain erosion of cash in banks. For funds intended for future use, participating in the real economy through broad stock indices is presented as the solution to protect against the rising cost of living.