Are Stocks Always Best for the Long Run?

Includes: DIA, QQQ, SPY
by: John Lounsbury

Barry Ritholz (The Big Picture) has a great graphic comparing the results of investing in two different vehicles on January 1, 1994 here. The graph is shown below:

This gives new meaning to the phrase: "Cash is king."

But this story doesn't stop yet. The following graphic, from a Barron's article in March (here) shows the time periods that bonds have outperformed stocks since 1801.

Bonds outperformed stocks over three long periods of time: 69 years to start the 1800s, 21 years through the Great Depression and 40+ years not yet completed. This latest long time period only qualified with the sharp market drop at the end of 2008. Before that recent drop in stocks there was a period of approximately 22 years (about 1980 to 2001) where bonds outperformed stocks that is now imbedded in the longer period.

In between these periods with superior returns for bonds, there were long periods of dramatic outperformance for stocks (1900-1929 and 1950-1967). The remaining long time period of the last 209 years (1872-1899), there were many see-saw battles for supremacy with the 28-year returns about the same for stocks and bonds.

So that gives interesting results for 206 years, shown in the following table:

This may be an astounding result to some. However, if we just look at the years since 1900, the advantage for bonds is less one sided, 62 years to 47. But since 1950, the advantage for bonds is greater again, 41 years to 18.

Of course, the advantage for bonds is changed when we look at returns instead of time. Almost any investment finance textbook will have data showing that for time periods encompasing most or all of the twentieth century, stocks outperformed bonds by a margin of better than 2:1 (average annual returns), inspite of the large advantage in number of years that bonds outperformed.

The graph above clearly shows that the performance for stocks and bonds for the entire 100 years of the nineteenth century were about equal. And of course you had to go all the way from Thomas Jefferson to Ulysses Grant to break even. In between, bonds were ahead for 69 years.

So, at least since 1900, stocks do outperform in the long run. However, there are times when you have had to run for more than 40 years to get the outperformance. We are in one of those 40+ year runs right now. Are you getting winded?