The following table and histograms show the history of risk and return for stocks (S&P 500), bonds (Citigroup high grade), T-bills and inflation. There are many lessons in this table, so it's worth your time and effort to review these results. Keep this article handy for those questions about the good and bad times in our capital markets. For example, here are a few of the lessons:
1. T-bills paid less than inflation in 2013, earning 0.09% in a 1.4% inflationary environment. We paid the government to use their mattress, as we have for the past ten years, with a 1.64% return in a 2.35% inflationary environment.
2. Bonds were more "efficient," delivering more returns per unit of risk than stocks in the first 44 years, but they have been about as efficient in the most recent 44 years. The Sharpe ratio for bonds is .45 versus .35 for stocks in the first 44 years, but the Sharpe ratio for both is about the same in the more recent 44 years, at .31 for stocks and .32 for bonds.
3. The past decade has been the third worst for stocks across the past eight consecutive 10-year periods. The decades 1934-1943 and 1964-1973 were slightly worse.
4. Average inflation in the past 44 years has been about 2.5 times that of the previous 44 years: 1.75% in 1926-1969 versus 4.26% in 1970-2013.
5. Long-term high-grade corporate bonds have fared reasonably well in the last five years, earning more than 4% per year above inflation, which is surprising in light of low interest rates. America has benefited from confidence in the U.S. dollar, resulting in decreases in interest rates.
6. The 8.59% standard deviation of monthly stock returns in 2013 is less than half the historical average of 19%. It was a year that went up month after month, with only a couple exceptions in June and August. High return with low risk.
Use this table to find the best and worst 5-year and 10-year periods, or to locate periods in the past that are similar to the current.
Find 2013 in this picture -- it's one of the best years. Compare it to 2008, one of the worst. Note also that there are plenty of years with returns in excess of 30%, as well as returns less than -20%. Contrast these to bond returns.
A bond return above 30% in any one year is a rarity; it only happened once, in 1982. But there have been several years with losses greater than 10%.
You'll find that the table and histograms above are a handy reference for researching questions about the history of U.S. capital markets. For example, you can look for previous 5-year periods that are like the most recent 5 years, and observe what happened next.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.