Before the invasion of the target date funds, most 401(k) plan investors were encouraged to leave their assets in funds that generally contained 100 percent stocks. Despite this, far too many employees opted for the “safety” of stable value funds. While the lack of volatility does indeed sound safe, it is anything but. For that reason, Congress passed the Pension Protection Act in 2006, which was, in part, meant to encourage retirement savers to move away from the “safety” of fixed income or stable value options into what many professionals acknowledged as more appropriate investments for long-term investors. Namely, equities.

The significance of these “more appropriate” investors is rarely discussed. Some simply assume the long-term superiority of equities. Others view them as a single arrow in the quiver of asset classes, neither better nor worse than any other arrow. The numbers, however, present a much less forgiving reality.

Investing for retirement is a very long exercise. We're not talking years, we're talking decades. And by decades, we're talking a lot closer to a century than not. For example, assuming a life expectancy of nearly 90 years, the number of years one invests for retirement is about 70 years. Of that, for at least 40 years, retirement assets are considered “long-term,” i.e., it will be at least five years before they are used. Those numbers emphasize the “long” in long-term.

The return numbers for that time period leave little doubt of the power of equities. Over all 40 year periods, a portfolio of 100 percent stocks produced the highest annual return, compared to any other asset allocation. That should surprise you. It's expected that the riskiest asset class produces the higher investment return. On the other hand, these other results will likely surprise you. That same 100 percent stock portfolio, in an analysis of 40 year returns, not only also has the highest median return, but its worst return is also the highest compared to all other asset allocations.

Not even the much beloved 60/40 equity/bond split comes close to a pure 100 percent equity portfolio. The 100 percent portfolio's median return is about 1.5 percent better than the 60/40 split portfolio. In terms of the worst performance of those 40-year periods, the 60/40 asset allocation lags the 100 percent stock portfolio by 2 percent per year! They like to make a big deal about paying 1 percent more a year in fees. Now double that and you'll see the real price of those “safe” portfolios.

It's no wonder retirement savers love their 401(k) plans. The more successful participants are proof of the long-term reality of 100 percent equity portfolios. This is especially instructive during those quite normal periods of cyclical downturns. When the market falls, it feels like forever. The naïve panic, lured by the “safety” of the short-term. One of the hardest jobs of the fiduciary is preventing investors from making knee-jerk reactions that are not in their own best interests.