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Stocks
vs Bonds
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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
|
. |
1-yr
|
5-yrs
|
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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