A new research paper casts doubt on the widely held dogma of stocks beating bonds over long periods
Introductory courses to investment teach us that while bonds offer predictable income, stocks always offer bigger long-run returns — for anyone who can endure the return volatility they come with, that is. But a new research paper from a retired professor calls that notion into question.
“The popular belief that there’s never been a 30-year period in which stocks had lower returns than bonds is false,” wrote Wall Street Journal columnist Jason Zweig. “As recently as 2011, bonds had earned higher returns than stocks over the prior 30 years (long-term Treasury bonds, 10.7% annually; U.S. stocks, 10.4%).”
Zweig cited new research from retired professor Edward McQuarrie at Santa Clara University, which involved expanding an online database of US stock and bond prices with information from digitized antique newspapers.
“That has enabled him to calculate 30-year returns beginning in 1823,” Zweig said. “Between then and 2013, he shows, bonds earned higher returns than stocks in one-quarter of all 191 three-decade-long periods.”
The information McQuarrie relied on comes from the same era as much of the data used by Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School, who authored the 1994 book Stocks for the Long Run.
But McQuarrie’s early data includes a wide variety of bonds that investors at the time would have had access to. In contrast, Siegel focused on the highest-quality and lowest-yielding bonds available — a sample that, according to McQuarrie, accounted for less than 5% of the total bond market in much of the 1800s.
The small sample used by Siegel, Zweig noted, approximates the risk-free rate — the return on a bond with the least possible danger of default. But as McQuarrie noted, there was no such thing in the early US days, which included defaults from eight states in the 1840s and bonds so risky that they had to offer yields of at least 5%.
“Sometimes bonds give you a better return; sometimes, stocks do,” McQuarrie said, calling determinations of bond returns based on just a thin slice of the market a “heroic extrapolation.”
Siegel countered that three-month Treasury bills, often the basis for the risk-free rate these days, are also just a small fraction of the bond market. But he did concede that in the early years of the US, “with bonds that had higher yields … the broad bond market may have outperformed stocks.”
Based on McQuarrie’s calculations, bonds averaged 5.9% annually from the beginning of 1793 through the end of 1877; that’s compared to 5.8% for stocks over the same period. “To come out ahead of bonds back then, you would have had to hold stocks continually for more than 85 years,” Zweig said.
One doesn’t even have to go back that far in history to see examples of bonds besting stocks, he added. In the post-1900 era, bonds in France, Italy, Japan, Spain, and other countries have earned better after-inflation returns than stocks for decades on end.