If your only option was to put all of your money into either 10-year Treasuries at today's rates, or the S&P 500, with no opportunity to touch the investment for 10-years, which would you choose?
We would choose stocks, hands-down, no question about it.
You may feel differently, so this article provides long-term data that may help you decide how you come out in this thought experiment.
And, if we had a choice between the S&P 500 (proxies SPY and IVV) or related securities such as the S&P 1500 (proxy ISI) or the S&P 1500 Dividend Aristocrats (proxy SDY), we would choose the latter, to recaptures as much of the principle investment as possible in periodic cash distributions during the 10 year obligatory holding period.
This is not an argument for buy and hold, nor an argument against asset allocation. We believe in adaptive, tactical asset allocation, and security substitution within allocations as valuations and prospects for specific securities change.
This is, however, an argument that the running-scared preference for 10-year Treasuries over US stocks in terms of asset preservation may be overblown.
If investors use the same 10 year time frame to compare 10-yr US Treasuries to US stocks, the risk discussion about stocks is a lot less scary.
10 Years With 10-Yr Treasuries
Over 10 years, the 10-yr Treasury will result in the return of face value, no less, no more. No reasonable chance of a nominal loss -- no chance of a nominal gain in price, little if any chance of a after-inflation, after-tax gain.
The principle recapture from cumulative cash distributions would be 15.2%
Rolling 10-Yr Statistics for US Stocks
We used the Shiller/Yale historical database for the "S&P 500" (S&P 500 since inception in 1957, and reasonable proxies prior to that, such as the Dow Jones index).
We calculated 10-year rolling periods for the end of each month.
Rolling 10-Year Periods For US Stocks:
Figure 1 and the following charts show the monthly detail behind the summary statistics.
Figure 1: Total Price Gain and Distribution Price Recapture
Figure 2: Total Price Gain and Distribution Price Recapture
(from 1945 -- end of WWII)
You can see in Figure 1, that in almost all periods from 1881, the total price return and dividend recapture of original price trounces the return that you could get with 10-year Treasuries today.
Don't think about whether continuous issued Treasuries over that 130+ years would have beaten contemporaneous stock purchases. You can't go back and relive that. Your choice today, in this thought exercise, is the Treasuries you can buy today and the stocks you can buy today.
The Treasury deal is contractually certain. The stocks deal is uncertain and highly variable, but an historical view, in conjunction with consideration of past circumstances, may provide reasonable enough information to help you make your binary choice -- one asset or the other.
If you had to sell your stock after 10-years beginning in late 1937, you would have had a loss. That loss would have grown to about 40% by mid-1939, and would have been restored back to a gain by late 1941. Don't forget that during that period, the world was still wracked by Depression, and war was brewing in Europe and Asia by way of the Axis powers of Nazi Germany and Imperial Japan.
We have not yet had a depression as great as that in the 1900's. We have central banks that did not exist back then, and we don't have war in Europe or Asia (although Syria is a hotspot that could enlarge internationally, and China is flexing naval muscle aimed at Japan, Vietnam, and the Philippines over ocean territories).
Figure 2 is more promising. Since WWII and up until March 2009 (the very bottom of the last crash), there was no period where the total of stock price gains and cumulative dividends resulted in a negative return over a rolling 10-year period.
There were a few short periods where the sum of price gain and dividends on stocks did less well than today's 10-year Treasury will do, but the longest period was for rolling periods ending from November 2008 through August 2009 --- so if you had held on for less than a year beyond 10, you would have outperformed today's Treasury.
From 1945, only 3.6% of the month-end rolling periods would have produced a combined gain less than today's 10-year Treasury -- a 96.4% "win rate" against today's Treasury bogie.
Only 2.8% of the month-end rolling periods had a negative return. That is a 97.8% "win rate" versus a break-even.
The average month-end, 10-year rolling result for stocks price gains plus dividends from WWII has been 10 times today's 1-year Treasury bond deal.
We'll take those risk/reward odds all day long.
The picture is not as good since 1881, but still better than today's Treasuries in our view. Stocks came out positive in 96.4% of month-end, rolling 10-year periods, and above the 15.2% gain for today's 10-year Treasuries 94.9% of the time. Still nice odds.
To "live" through the worst decline since 1881 and come back to a combined gain better than today's 10-year Treasury would have required a 12 year hold. The worst period went from November 1938 through October 1940 -- very tough years around the world -- tougher than today we think.
Historical Side-Bar for the 1938-1940 Underperformance Period
Here is some of the very bad news that was a backdrop to the poor stock showings in 1938-1940:
- Joseph Goebbels organizes Crystal Night (7,500 Jewish shops destroyed and 400 synagogues burnt down). 9th November, 1938
- The German Army invades Czechoslovakia. 15th March, 1939
- Joseph Stalin and Adolf Hitler sign the Nazi-Soviet Pact. 23rd August, 1939
- The German Army invades Poland and annexes the free city of Danzig. 1st September, 1939
- Britain and France declare war on Nazi Germany. 3rd September, 1939
- Germany formally annexes western Poland into the German Reich. 1st November, 1939 The German Army invades Denmark. 8th April, 1940
- The German Army invades Norway. 8th April, 1940
- Netherlands surrenders and Queen Wilhelmina flees to England. 14th May, 1940
- Belgium surrender to the German Army and Leopold III is arrested. 28th May, 1940
- The German Army enters Paris. 14th June, 1940
- The Luftwaffe began attacking RAF Fighter Command's aircraft, airfields and installations. 13th August, 1940
- The Luftwaffe carry out a all-night bombing raid on London and begins the Blitz. 23rd August, 1940
- Adolf Hitler meets Francisco Franco an attempts to persuade Spain to join the war. 23rd October, 1940
That would be enough to spook any market, at the same time the Depression effects abounded. We are not in such dire straights today.
Decomposition: Stock Prices Only
Figure 3 shows that over rolling 10 year periods, broad US stock indexes (the S&P 500 since 1957) have resulted in price change of more than break-even in 78.7% of monthly ending periods since 1881 (that includes the Great Depression, multiple panics in the late 1800's, the assassination of President McKinley 1901, threats by President Theodore Roosevelt to reign in corporate monopolies , WWI, and WWII). In spite of those many bad spells US stocks had positive price returns in nearly 8 out of 10 rolling 10 year periods.
Figure 4 shows that since the end of World War II, stocks have resulted in a net price gain over rolling 10-year periods 91.3% of the time. The worst string of 10-yr rolling negative price change was 28 months from 10/2008 through 1/2011. That means the longest holding time that would have been required to break even on price since WWI was about 12.5 years.
Decomposition: Cumulative Dividends Only
Figure 5 from 1881 shows the monthly rolling 10-year cumulative dividends from US stocks.
Figure 6 show the same rolling returns from 1945.
Those data show why we would bet on stocks, not today's 10-year Treasuries if we had only a one-time, irreversible decision to make a binary choice for minimum 10 year holding period.
What would you do? Remember, there are no other choices in this thought exercise.
General Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here.
Disclosure: QVM has positions in SPY as of the creation date of this article (July 16, 2012).