The Terror-Proof Portfolio Fallacy

Since the horrible events of September 2001, a slew of financial pundits have offered their opinions on how to "terror-proof" your portfolio.

Their advice usually centers on investing in Treasury bonds, gold, Treasury bills, or some combination of the three, with the logic being that these vehicles will remain firm during periods of stock market volatility.

Sure, gold prices have moved higher in past bear markets, but they're also quite volatile; Treasury bonds and bills are backed by the "full faith and credit of the U.S. government." While these vehicles may have a place in your portfolio, over the long run, none of them has proven to be a great wealth builder.

For instance, from 1928 to 2006, gold has returned 4.4% per year on average, bonds 5.2%, and bills about 3.9%.

That's only modestly better than the historical rate of inflation. You can do better.

A roadmap to "better"
The U.S. stock market, on the other hand, is among the greatest wealth creators the world has ever known. And it's also proven to be quite resilient. Think about it: In the past 100 years, the market has persisted through two World Wars, the Cold War, the Great Depression, two major market crashes (1929 and 1987), and numerous other major events. And yet, somehow, despite these trying times, the market managed to generate approximately 10% average annual gains.

Even in just the past 10 years, the market has endured a tech bubble/bust, a recession, rising oil prices, and the war on terror. But the market has continued to be strong over this period. Consider:

Putting it all together
It's perfectly natural to worry about what's going to happen to your portfolio when the next shockwave rattles the financial markets. No one wants to see their stocks drop 10% or more in a short period of time. But if you follow three rules of investor temperament, the stock market is your single best option for growth:

• Have a long time horizon.
• Regularly add to your stocks.
• Develop the patience and mindset to stomach volatility.

The secret to superior stock market returns has always been, and always will be, buying stocks of companies with quality management that are built to last for generations.

Quality comes in many shapes and sizes. The companies in the table above certainly qualify (as their returns illustrate). If you'd like some help finding quality stocks worth holding onto in any market condition, you can cheat off our list of recommendations at Motley Fool Stock Advisor. Since inception five years ago, our Stock Advisor recommendations are beating the market 61% to 27%.

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Todd Wenning is already looking forward to next season, when the St. Joseph's Hawks will undoubtedly regain the Big 5 title. He does not own shares of any company mentioned. Time Warner and Best Buy are Motley Fool Stock Advisor picks. Legg Mason is an Inside Value choice. Like the Hawk, the Fool's disclosure policy will never die.