Stocks are risky. Not owning them is even riskier

Your recent column about the shortcomings of guaranteed investment certificates dangerously oversimplifies equity risk for conservative investors. Glossing over volatility, emotional behaviour and sequence risk creates the illusion of safety, when in fact, capital loss in a downturn could be devastating for your readers. I urge you to revisit the framing and include proper risk disclaimers.

I don’t think it’s accurate to say my column “glossed over volatility” and other risks of owning stocks. Rather, I acknowledged that the stock market has had “plenty of ups and downs,” but said that “volatility is the price investors pay for the superior returns that stocks deliver.” Having invested for more than 30 years and achieved results that would never have been possible with fixed-income investments alone, I believe that owning equities is essential for long-term investing success.

Nor did I encourage anyone to throw caution to the wind and put all of their capital into equities. Notwithstanding the many drawbacks of guaranteed investment certificates that I mentioned – including lack of growth and unfavourable taxation – I stressed that “GICs have their place in a well-balanced portfolio … they provide stability and peace of mind during periods of market volatility. That’s why, for the fixed-income portion of one’s portfolio, GICs are a good solution.”

I think most people are aware that they can lose money on stocks. But my point was that volatility should not be a reason to avoid equities. As for the emotional and behavioural risks of investing in stocks, I frequently remind readers that staying diversified, holding through good times and bad, and staying focused on the long run are critical for building wealth.

With that in mind, let’s take a deeper dive into the long-term performance of stocks vs. fixed-income investments. For this exercise, I’ll be comparing the 20-year returns of two exchange-traded funds – the iShares S&P/TSX 60 Index ETF XIU-T and the iShares Core Canadian Universe Bond Index ETF XBB-T – and assuming an initial investment of $10,000 in each on June 1, 2005.

Before I discuss how each of these ETFs performed, I should remind everyone that the past 20 years included plenty of stock market setbacks, including the financial crisis of 2008-2009, the COVID-19 pandemic, which began in 2020, and, more recently, the tariff-related selloff that rattled global markets.

Now for the good news. Even with these and other severe market slumps, XIU – which holds a basket of Canada’s 60 largest companies – posted a 20-year total return, through May 31, 2025, of about 8.4 per cent annually. Assuming all dividends were reinvested, an initial $10,000 investment would have grown to about $50,125.

Turning to the bond ETF, XBB wasn’t nearly as volatile as XIU. But while XBB investors might have felt safer and more secure during market downturns, over the long run they would have paid a hefty price for their short-term comfort. For the 20 years through May 31, XBB posted an annualized total return of just 3.2 per cent, which would have turned $10,000 into $18,862.

That’s a total return of 88.6 per cent for XBB, compared with a gain of more than 400 per cent for XIU. It wasn’t even close.

Why have stocks outperformed bonds over long periods? Well, when you buy a bond, you’re entering into a contract with a government or business to pay you a fixed rate of interest over a specified period of time, and to return your capital when the bond matures. These protections help to limit your downside risk but they sacrifice potential growth.

When you buy a stock, on the other hand, you become a part-owner of a business. If that business grows, your slice of the pie becomes more valuable. What’s more, if the company pays a dividend and increases it regularly, your income will also grow alongside the rising share price. So you win two ways.

GICs 101: When is a guaranteed investment certificate worth investing in?

Explainer: What is the stock market and how does it work?

True, not all businesses thrive. Some go bankrupt. Others tread water for years. But there’s a simple way to limit such risks: it’s called diversification. If you hold a broadly-diversified ETF or basket of high-quality stocks, the damage to your portfolio will be limited when one of your stocks hits a pothole. And, trust me, it will happen.

Again, I’m not suggesting that people should avoid bonds and GICs altogether and put all of their money into stocks. Rather, investors should allocate a portion of their portfolio to equities and fixed-income investments to suit their own risk tolerance, investing goals and time horizon. For some people, a traditional 60-40 split of equities and fixed-income, respectively, can work. Others might prefer a higher, or lower, equity weighting.

But if you avoid stocks altogether, you’ll almost certainly be consigning yourself to a lifetime of subpar returns.

E-mail your questions to [email protected]. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.