Stocks (S&P 500)
Return
Average annual real return = 6.97%
Risk
Over any randomly selected 18-month time period, there was:
• A 29% probability of losing at least 0%
• A 27% probability of losing at least 1% (unannualized)
• A 26% probability of losing at least 2% (unannualized)
Over any randomly selected 24-month time period, there was:
• A 27% probability of losing at least 0%
• A 26% probability of losing at least 1% (unannualized)
• A 25% probability of losing at least 2% (unannualized)
• A 24% probability of losing at least 3% (unannualized)
Bonds (50% U.S. Treasurys, 50% U.S. corporates)
Return
Average annual real return = 2.86%
Risk
Over any randomly selected 18-month time period, there was:
• A 27% probability of losing at least 0%
• A 24% probability of losing at least 1% (unannualized)
• A 21% probability of losing at least 2% (unannualized)
Over any randomly selected 24-month time period, there was:
• A 26% probability of losing at least 0%
• A 23% probability of losing at least 1% (unannualized)
• A 20% probability of losing at least 2% (unannualized)
• A 18% probability of losing at least 3% (unannualized)
These summary statistics go a long way toward demonstrating stocks’ dominant role in providing the growth component (stocks’ higher average real return was 6.97%) in any well-diversified portfolio. At the same time, the statistics show bonds’ lower-risk, stabilizing attributes (bonds had a lower, 18% probability of delivering a loss greater than 3% during any 24-month long period), which are suitable for portfolios defined by short investment time horizons.
Bonds’ Very Difficult 20 Years, 1954-1974
Now let’s examine the 20 years ended April 30, 1974, presuming that this period could be remarkably informative for the next 20 years. As you will observe from the summary statistics below, during these 20 years, the return to bonds virtually disappeared, while their risk increased (on a proportionate basis) by 38%.
For the 20 years ending April 30, 1974, (after an adjustment for inflation):
Stocks (S&P 500)
Return
Average annual real return = 6.47%
Risk
Over any randomly selected 18-month time period, there was:
• A 26% probability of losing at least 0%
• A 24% probability of losing at least 1% (unannualized)
• A 22% probability of losing at least 2% (unannualized)
Over any randomly selected 24-month time period, there was:
• A 24% probability of losing at least 0%
• A 22% probability of losing at least 1% (unannualized)
• A 19% probability of losing at least 2% (unannualized)
• An 18% probability of losing at least 3% (unannualized)
Bonds (50% U.S. Treasurys, 50% U.S. Corporates)
Return
Average annual real return = 0.51%
Risk
Over any randomly selected 18-month time period, there was:
• A 39% probability of losing at least 0%
• A 33% probability of losing at least 1% (unannualized)
• A 29% probability of losing at least 2% (unannualized)
Over any randomly selected 24-month time period, there was:
• A 44% probability of losing at least 0%
• A 35% probability of losing at least 1% (unannualized)
• A 27% probability of losing at least 2% (unannualized)
• A 21% probability of losing at least 3% (unannualized)
These data are highly instructive and demonstrate quite clearly just how much this 20-year period differed from long-run averages for both stocks and bonds! Certainly, this was not an attractive period for either. Both asset categories suffered relative to their long-run average returns (the last 93.92 years). However, bonds suffered far more than stocks. And in fact, the risk profile of stocks was actually somewhat milder.
When measured proportionately (against the long-run characteristics) stocks fell by 7%, but the risk of stocks also fell, by 15%. In contrast, the return on bonds fell by 82% (it was almost eliminated), while the risk of bonds increased by 38%. During this 20-year period, by some measures, bonds ended up being measurably riskier than stocks. Notice how the probability of the well-diversified bond portfolio delivering an absolute loss (over any randomly selected 24-month period) was a full 44%. Bonds were a quite risky bet during these two decades.