Ownership vs Loanership
(Equity vs Debt)
i.e. Stocks vs Bonds
Virtually everyone is looking for three things when it comes to investing. First is capital preservation (“don’t lose my money!”). Second is good returns (“make my money grow!”). Third is tax efficiency (“I don’t want to pay too much tax!”).
Growth of capital is best achieved through the ownership of assets, not by loaning your money. If you opt for certainty (guaranteed investments) with your investment program, you are risking terrible insecurity in the future. Conversely, the more uncertainty you can accept up front, the greater the long term opportunities you have for financial independence. Over the long term stocks have consistently outperformed all other investment alternatives.
When you own common stock you have equity (ownership) in a business. When you hold interest bearing investments like GICs, CSBs, bonds, etc, (loanership), you are owed money and someone is in debt to you. If your goal is wealth accumulation, i.e. growing your money, to meet some future goal like retirement, then ownership is clearly the best approach.
The long term numbers for the U.S. bear this out quite dramatically:
Average Annual Compound Returns - after inflation and taxes
1926 to 1998:
|5.8% ||5.0% ||1.1% ||0.7% |
|Small Cap Stocks ||Large Cap Stocks ||Corporate Bonds ||Government Bonds |
Source: Ibbotson Associates
It seems clear that long term inter-generational wealth happens through ownership of equities. Debt or loanership has produced virtually no real return (net of inflation and taxation), whereas the owner of equities received about five times that of the loaner. In fact, Jeremy Siegel, author of one of the best books on equities - ‘Stocks for the Long Run’, shows that stocks have returned (after inflation and taxes) 7% a year since 1802.