Shocker: Treasury bonds beat stocks in the long run

Back in 1994, a Wharton professor by the name of Jeremy Siegel published a book (called Stocks for the Long Run) that helped form the basis of investing advice for the next decade. The book’s well-known conclusion: Stocks have returned on average about 7% (after inflation) for the last 200 years. Investors were almost guaranteed to get a positive return if they held on for at least 20 years.

Wharton professor Jeremy Siegel

Wharton professor Jeremy Siegel

There’s been a lot written about the “lost decade” for stocks, in which the market’s return has been zero or negative. But a new study by Rob Arnott shows that stock returns have been even worse when compared to the returns of U.S. Treasury bonds. (4/21 update: The study has come out.)

The study is running in the Journal of Indexes in their May/June issue. So I can’t yet link to it and have been asked not to quote it verbatim. But its basic conclusion is this: Starting at any time from 1980 to 2009, an investor in 20-year Treasury bonds, who rolled over their income every year, beat the S&P 500. From January 1969 through the end of this January, such a bond investor would also come out ahead (albeit by a small margin).

If you go back to 1801, stocks did beat those bonds by an average 2.5 percentage points per year (which is huge). But the Treasury bonds beat stocks during three long periods — between 1803 and 1871, between 1929 and 1949, and between 1968 and 2009.

The implications of this are pretty massive. For the most part, Treasury bond investors don’t have to worry about dramatic volatility. Stock investors do. As a result, stocks are supposed to provide a “risk premium” of a couple percentage points to pay for that chance their investment could drop. In effect, Arnott’s saying that the risk premium hasn’t been there for the last four decades. You could have chosen the absolute safest investment known to man and performed better than the guys rolling the dice on the stock market.

What does this mean to you, an investor looking to the next 40 years? It does not mean to stick all your money into Treasury bonds. Just as investors were wrong to think the stock market would roll on forever in the late 90s and early 00s, it’d be wrong to think Treasuries will beat stocks from now on.

Instead, the study reminds me of all those retirement scenarios that planners love to run. “If you invest 60% in stocks and 40% in bonds,” the scenarios say, “you’ll have a 95% chance of not running out of money in retirement.” But that means you do have a 5% chance that those assumptions don’t come true. And is a 5% chance of not making it small or big? You only get one shot at retirement.

You can’t control the market’s performance. Your job, then, is to make that outside chance of something terrible happening as small as possible. How can you do that? For me, it means saving more. I’m sticking 20% of my income into stocks and bonds every paycheck instead of 10%. I’ll have to live frugally, but that beats not making ends meet. It might seem like a big sacrifice to bring my chances from, say, 95% to 98%. All those new retirees might have thought the same thing 40 years ago.

– Joe Light

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3 comments so far

  1. […] I’ve written about allegedly shady practices at a popular mutual fund company, why many popular assumptions about stock returns might be false, and a big problem with target-date retirement […]

  2. […] I’ve written about allegedly shady practices at a popular mutual fund company, why many popular assumptions about stock returns might be false, and a big problem with target-date retirement […]

  3. […] I’ve written about allegedly shady practices at a popular mutual fund company, why many popular assumptions about stock returns might be false, and a big problem with target-date retirement […]


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