It will come as a surprise to many to realise that, over numerous periods and for a long time, we have experienced decades in which stock market returns have not outperformed bond returns. It is important to emphasise that we are not saying it is more profitable to invest in bonds than in shares, nor the opposite, as it essentially depends on the economic cycle we happen to be experiencing as investors. And we must remember that our lives as investors are short compared to the long-term charts that can cloud our judgement. A generation’s ability to generate wealth that can be invested in the stock market or fixed-income securities is usually limited to a few decades, assuming we are able to hold assets, remain consistent and disciplined, and also enjoy a long life in which to make such investments. In short, the circumstances of most ordinary people prevent them from reaping the long-term benefits of either market, with a few exceptions. Another matter is the intergenerational transfer of portfolios, which is usually rare and only relatively common in the case of vast fortunes.
The following chart shows the cumulative relative performance of shares compared with bonds over the last 207 years. The periods during which the stock markets did not exceed their previous high are marked by horizontal lines. High Water Mark.
We must also analyse specific periods that reveal more than a simple glance at the chart would suggest. In fact, the life of an investor consists of nothing more than small segments of very long-term charts such as this one. Any investor who had entered the S&P 500 market; between 1980 and 2008, and up to January 2009, would have achieved worse returns than if they’d invested in the 20-year US Treasury bond (20Y T-Bond), also relative to January 2009. Surprising, isn’t it? Well, there’s more. If we go back 40 years, to 1969, investors in 20-year bonds would still have outperformed those in the stock market right up until January 2009 (even though bonds went through a very rough patch during the 1970s).
As we can see from the graph, out of the 207 years of historical data, there are three long periods during which stock market returns did not outperform the 20-year bond: 1803–71, 1929–49 and 1968–January 2009. That’s a total of 129 years out of 207. Remarkable. Statistically, therefore, it is highly likely that, throughout the investment lives of our ancestors and our own, we have at least partially overlapped with periods in which equities have not outperformed fixed income. Compound interest works wonders over the long term, and although our memory may be short and selective, history is full of long periods in the markets when, to say the least, flat.
Where do we stand at the moment? Nobody knows, but the fact is that we’ve come out of a period of stock market bubble-like excesses that have led to a crash, and we don’t know when it will bottom out. Of course, a crash like the current one usually brings with it rebounds and the beginnings of new rallies, during which investment in fixed income is clearly outperformed. I would therefore not want this article to be interpreted as a defence of one type of investment over another – not at all. It is simply an observation of some data that has surprised us and which need not necessarily occur in our investment lives (which, incidentally, we do not know how long will last either). Furthermore, as we always say, we are facing a scenario of systemic collapse that will usher in a new world of investment, where the charts from the last 207 years are likely to be of little help to us. It also seems reasonable to think that, in the near future, we will learn a lesson from the excesses and stock market bubbles of the last 50 years, during which the world has never stopped expanding and inventing new ways to generate credit, financial engineering and virtual wealth.
To conclude, I would point out that when analysing all this data, we must bear in mind that the risk premium typically required for investment in the stock market is that it should exceed the yield on the 20-year government bond by 5%. We must also bear in mind that the rally from January 2009 (the end date of the chart) to the present day significantly improves the returns on stock market investments. And finally, dividend yields from equity investments have not been taken into account either.
Nor can I resist reminding you that long-term wealth growth will depend to a large extent on the returns we are able to achieve on our property and corporate assets, as financial growth is merely one part – albeit a common, yet unfortunately minor, part in these times – of our total wealth.