Stocks For The Long Run, 6

Yesterday, we cited Peter Bernstein’s article in the FT saying that long-term bonds have handily outperformed stocks for the past 5, 10, and 25 year periods.  We didn’t have a chart illustrating this, so we asked you to pitch in.  And we immediately got three charts from Matt Smith, along with some very helpful commentary (below).

The bottom line: According to Matt’s data, stocks have  outperformed most fixed income over 25 and 55 years.  Over 10, they’ve been clobbered.

[Third] chart shows performance over the past 55 years (didn’t have bond data for prior to 1953 readily available) and is presented in log scale (which is generous to bonds).  As you can see, bonds were killed by stocks over this very long period (even with the recent declines in the index).  In fact, the return over this period was more than three times larger for stocks over bonds.  

The other two charts are in linear scale, showing percentage returns over the past 25 years and the past 10 years.  On the 25 year chart, bonds are starting to catch up to stocks.  This doesn’t quite jive with the Ibbotson data reported in the FT article.  This is probably because Ibbotson are using issue-level data that would give the precise yield to maturity for issues that could have been bought over time.  I also thought they might be using a laddered approach so I added some laddered portfolios to this graph.  These are simple ladders that buy one new issue each month at the yield specified in the data (assuming it was possible to do so, which may or may not be the case), and old issues fall out of the portfolio as they mature. For the 10 year chart, it’s completely clear bonds have dominated stocks over this or any shorter period.

All of the bond data is from the Federal Reserve, and the S&P 500 data is from the popular data set provided by Bob Shiller on his website.

Thanks, Matt!