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Stocks vs Bonds

How risky are stocks compared to bonds?  The answer may surprise you.  It depends on what your investment horizon is.  Listed below are the returns on three classes of investment for different holding periods.  The record covers Jan 1926 through Dec 1994, a total of 69 years.

Each holding period starts at the beginning of the year, and periods longer than 1 year successively overlap each other.  Only the maximum and minimum returns for each case are shown.  The data came from the 1995 Yearbook of Ibbotson Associates.  Large company stocks comprise those in the S&P500 index.

Annualized Return in Percent vs Holding Period
10-yrs 15-yrs 20-yrs
Large company stocks . . . . .
Maximum return  54.0 23.9 20.1 18.2 16.9
Minimum return  -43.3 -12.5 -0.9 0.6 3.1
Long Term T-bonds . . . . .
Maximum return  40.4 21.6 15.6 11.7 10.1
Minimum return  -9.2 -2.1 -0.1  0.4  0.7
Treasury bills . . . . .
Maximum return  14.7 11.1  9.2 8.3 7.7
Minimum return  0  0.1  0.1 0.2 0.4
Risk is often measured in terms of short term volatility, but that is not the best measure for the long term investor.  The record shows that for holding periods of 15-years and longer, the worst case return on large company stocks was always greater than the return on bills and bonds, even though the range between minimum and maximum was greater for stocks.  Further, the returns for the longer periods were never negative.

It would be safe to conclude that anyone with an investment horizon of 15 years or longer will likely suffer an opportunity cost by investing in bonds. This is also true for bond funds, even more so because the fund expenses are paid by the investor.

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