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Historical Asset Performance

 

 
 

 
 

HISTORICAL ASSET CLASS PERFORMANCE

 OF STOCKS, BONDS, BILLS, & INFLATION

 

  

 

Past performance is not a guarantee of future results.  Stock investing involves risk including loss of principal.  Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. 

 

This article examines graphically the long-term historic performance and returns of the five major asset classes of stocks, long-term bonds, T-bills, Gold and the U.S. dollar. The results are truly enlightening. The results are based on U.S. data from 1926 through 2010. The data source is a well-known reference book called "Stocks, Bonds, Bills and Inflation" 2011 edition. The book is published annually by Morningstar. (Ibbotson SBBI classic yearbook). In addition we added gold's long-term performance from www.onlygold.com.

Note that most analysis of historic returns that you have seen is horribly flawed in that it is based on "nominal" returns before inflation. The graphs and figures below are based on "real" returns after inflation. That is, this analysis shows the real increase in purchasing power generated by each investment asset class.

The graph below shows the long-term real (after inflation) returns on large capital U.S. stocks (The S&P 500 stocks), long term U.S. Treasury bonds (approx 20 years), U.S. Treasury Bills (30-day cash investments) and the real value of a U.S. dollar after inflation) and Gold. The return is illustrated by showing the growth over the years of a $1.00 invested in each asset at the end of 1925.

Past performance is not a guarantee of future results.  Stock investing involves risk including loss of principal.  Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. 

 

In real-dollar terms (adjusted for inflation), large U.S. stocks have absolutely walloped long bonds, short-term cash investments, Gold, and the dollar itself in terms of total growth or return. Each $1.00 invested in large stocks at the end of 1925 is now worth $244 (85 years later at December 31, 2010). Compared to large stocks, the other asset class values after 85 years are so low they barely show up on the graph. (We'll fix that below) $1.00 invested in long U.S. government treasury bonds for those 85 years is now worth $6.88. (It's not shown but $1.00 invested in U.S. long-term corporate bonds in 1926 did slightly better than treasury bonds and is now worth about $7.60.) $1.00 invested in T-Bills in 1926 is now worth just $1.68. $1.00 invested in Gold for the 85 years is now worth $5.62. $1.00 left literally in cash and not invested at all is now worth only 8 cents, due to the ravages of 85 years of inflation.

 Remember, all figures are after inflation and assume reinvestment of dividends or interest received and also assume tax-free and no-fee investment accounts. (With taxes the growth would be less dramatic but would be even more in favor of stocks given the lower tax rates on capital gains and dividends. However since the Gold held for the 85 years would attract no taxes and no transaction fees it would improve relative to stocks if those were taken into account.)

This means that if old Grampa had foregone just 1 case of beer at the end of 1925 and invested the money, in a tax-free account, in the S&P index of large stocks (and reinvested all dividends and rebalanced to stay with the index over the years, and ignoring transaction costs), his grandson, at the end of the year 2010, could go out and buy 1 case of beer and still have enough left to buy 243 more cases!  (Later I will show that there are some pretty good returns over 20 year periods, so you don't have to actually invest for 85 years!). Note, however, that the year-end market data peaked at the end of 1999 when the $1.00 in stocks had grown to $303.

This out-performance of stocks (which beat long-term government bonds by a factor of $244/$6.88 or 35 to 1, in the 85 years) has occurred in spite of the two huge stock declines that have occurred since the year 2000, not to mention the stock crash of the great depression. The stocks also beat Gold by a factor of $244/$5.62 or 43 to 1.

The T-Bill investment at $1.68 has just barely kept ahead of inflation. And a dollar kept literally in cash as in a safe deposit box or under a mattress still is the same dollar but it now buys only what 8 cents would have bought in 1926.

The above graph which has a normal linear scale does a great job of showing the difference in the ending portfolio values but unfortunately is distorted in three ways.  First, the results from the earlier years are not really visible, Second, it looks like the percentage rate of growth for stocks was increasing toward infinity until 1999, and third it also looks like the early 2000's stock crash was by far the biggest market crash ever.  A logarithmic scale solves these problems because a constant percentage growth appears as approximately a straight line and the percentage gains in the earlier years are much more visible. Unfortunately a logarithmic scale tends to somewhat obscure the huge differences in the ending values. When viewing a growing data series it is probably best to view it with both logarithmic and linear scales to better understand the results.

The same data presented in the above graph is presented below with a logarithmic scale.

Past performance is not a guarantee of future results.  Stock investing involves risk including loss of principal.  Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.  

 

Conclusions and Summary 

By studying these graphs, you can draw your own conclusions about the relative returns and risks of Stocks, Bonds, T-Bills and Gold. And you can see the decline in purchasing power that occurs with actual cash held in a safe or in a mattress for 20 year periods.

Note that these total return indexes ignore taxes (effectively assumes a non-taxable account) and also ignore trading costs.

Stocks out-performed Bonds and T-bills and Gold by an absolutely staggering amount over the last 85 years. Stocks therefore also did a far superior job of protecting against inflation over the full 85 year period.

Stocks even out-performed over the 20 years from 1926 through 1945, in spite of the depression and crash of 1929-1932. Bonds also did reasonably well. T-Bills were basically the after inflation equivalent of stuffing cash under the mattress. Gold did reasonably well in the end but was highly volatile in terms of purchasing power. Actual cash in a mattress basically rotted away.

For the 20 years from 1946 to 1965, stocks were far superior. Bonds and T-Bills imitated mattresses (but did protect against inflation, although not fully). The dollar itself and Gold which was tied to the dollar both lost almost half of their purchasing power. 

The 20 years from 1966 through 1985 were ugly all around (unless one held Gold). Stocks came out slightly ahead of bonds. Gold had very large returns as it was de-coupled from the U.S. dollar and as Americans were again allowed to own it.

During the 20 years ended 2005, Stocks did very well but with high volatility, Bonds did unusually well compared to stocks and with a lot less volatility. T-Bills continued to only slightly out-perform inflation. Gold slightly trailed inflation.

In the 20 years ended 2010 stocks barely beat out long-term government bonds and were also extremely volatile. Despite its recent huge surge, Gold was not a very good investment if held over the full 20 years.

A major learning from the above graphs is that the markets look very different in different time periods. It would be foolish indeed to base your investment decisions solely on the results from the last 20 years or so. Those two decades were unique due to a combination of low inflation and declining interest rates. Long-term interest rates probably won't get much lower and so the next 20 years is sure to look far different than the most recent two decades.

The above data and graphs focus on just four investment periods beginning at the end of 1925, 1945, 1965, and 1985 (plus the over-lapping period beginning at the end of 1990). Given the significant differences in the performance of stocks, versus bonds or T-bills and Gold over those four+ periods, it is also very useful to look at the comparison over all the possible 10 to 30 year holding periods beginning each year since the end of 1925. 

Because the returns of different asset classes typically vary over time a diversified approach to investing is a great way to minimize volatility and achieve long term returns above inflation. 

 

 


Sources:  Morningstar, Ibbotson, InvestorsFriend.com

 

 

 

 

 

 


 

 

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.  Insurance products offered through LPL Financial or its licensed affiliates.  Bedford Federal Savings Bank and Bedford Federal Financial Services are not registered broker/dealers and are not affiliated with LPL Financial.  The LPL Financial Registered Representative associated with this site may only discuss and/or transact securities business with residents of the following states: IN and FL.

 

 


 
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