Ibbotson Shows the Stock Market is the Place to Be

by: Eddy Elfenbein

Eddy Elfenbein submits: I just got my copy of the 2006 Ibbotson Yearbook in the mail. Ibbotson is a money management firm in Chicago that’s best known for keeping long-term performance information on the stock market (the company was recently bought by Morningstar).

The yearbook tracks the monthly performance of stocks, bonds, treasuries and inflation since 1925. It’s a fascinating resource. The yearbooks are available at many libraries, but being a data junkie, I like to get my own copy. You can order a copy here.

The data confirms that the stock market is the best place to be. Over the last 80 years, large-cap stocks have gone up an average of 10.36% a year (dividends and capital gains). One dollar invested in 1925 would be worth over $2,600 today. On average, the market doubles every seven years. Nothing beats it.

When you look at the long-term chart, even ugly periods like 1987 appear as minor blips. It’s true that bear markets can be painful, but the long-term data is clear. The market goes up, up and up. The only hitch is that you have to be patient.

Stocks are also big winners against bonds. Long-term corporate bonds have averaged 5.92% a year. Long-term Treasuries have average 5.47% a year, and T-Bills have returned just 3.71% a year.

Ibbotson also looks at small-cap stocks, and that group has done even better than the large-caps. Since 1926, small-caps have averaged 12.64% a year. By small-cap, Ibbotson generally means stocks that are in the smallest 20% of the market’s universe, although they’ve recently altered their criteria.

Ibbotson also breaks out the performance of each size decile, or 10% slice of the market. What’s interesting is that the returns are almost perfectly rank-ordered—the smallest 10% has done the best, and the largest 10% has done the worst.

Since 1926, the smallest decile has returned an average of 13.96% a year. My only caution about micro-cap investing is that although the “outperformance premium