I wouldn't dream of investing in equities over a period of just 4 years

[galway_blow_in]

Hi Brendan

Essentially it's because the probability of stocks beating bonds increases over longer holding periods.

Again looking at historical US data, the probability of stocks (total US market) beating bonds (5-year treasuries) increases to roughly 80% over 10-year holding periods, 90% over 15-year holding periods and (essentially) 100% over holdings periods of 20 years and longer.

It's also relevant that the probability of suffering a loss on equities diminishes over longer holding periods. Remember Mr Buffett's golden rule of investing – never lose money!

The following are the worst real annual returns of the S&P500 over different holding periods from 1871 to 2016 (with dividends reinvested).

3 years -35.2%
5 years -13.2%
10 years -5.9%
20 years -0.2%
30 years 1.9%
40 years 3.2%

I also try to emphasize that investment costs and taxes can skew the risk/reward analysis quite dramatically so that paying down debt (essentially the same thing as buying a tax-free, cost-free bond) is often the best use of after-tax savings on a risk-adjusted basis.

Hope that makes sense.

im pretty sure thirty year u.s treasuries have beaten the s + p since the year 2000 , not quite twenty years but close enough

bonds are very expensive today , especially in europe , european equities are no higher than ten years ago, they seem incredibly cheap compared to bunds for example

 

[Sarenco]

im pretty sure thirty year u.s treasuries have beaten the s + p since the year 2000 , not quite twenty years but close enough

That is correct and we have recently seen a thirty-year period where 20-year US treasuries beat the S&P500. However, I specifically referred to five-year US treasuries.

The pricing of any liquid, publicly traded security already reflects the market consensus view.

 

[galway_blow_in]

That is correct and we have recently seen a thirty-year period where 20-year US treasuries beat the S&P500. However, I specifically referred to five-year US treasuries.

The pricing of any liquid, publicly traded security already reflects the market consensus view.

my mistake , i overlooked where you specifically referred to five year treasuries

 

[Sarenco]

No problem GBI.

I actually think you highlighted an excellent point that we all understand intellectually but behaviourly we always forget or ignore - that past performance is no guarantee of future returns.

Prior to September 2011, it was accurate to say that US stocks had beaten long-term US treasuries over every single 30-year holding period since the US civil war. Can't say that anymore.

In fact, there isn't a single major developed market that I know of where domestic stocks have beaten domestic long-term government bonds over every single 30-year holding period.

I'm not suggesting that I have a clue how things are going to pan out over the next 30 years - I don't. I can make guesses. I can formulate probabilities based on historic data and current valuations. But at the end of the day, I really don't have a clue what's going to happen.

We all want to extrapolate the future from what happened in the past. Unfortunately, markets don't work like that.

 

[galway_blow_in]

No problem GBI.

I actually think you highlighted an excellent point that we all understand intellectually but behaviourly we always forget or ignore - that past performance is no guarantee of future returns.

Prior to September 2011, it was accurate to say that US stocks had beaten long-term US treasuries over every single 30-year holding period since the US civil war. Can't say that anymore.

In fact, there isn't a single major developed market that I know of where domestic stocks have beaten domestic long-term government bonds over every single 30-year holding period.

I'm not suggesting that I have a clue how things are going to pan out over the next 30 years - I don't. I can make guesses. I can formulate probabilities based on historic data and current valuations. But at the end of the day, I really don't have a clue what's going to happen.

We all want to extrapolate the future from what happened in the past. Unfortunately, markets don't work like that.

while i realise there are many variables , might it be likely that the huge involvement of central banks this past twenty years has been the biggest thing to determine which way bonds went in comparison to stocks

i think this is especially the case in the eurozone , i was checking out how the spanish , italian and french stock market performance since the mid nineties on a site yesterday , in the case of france , the market high was way back in 2000 , in the case of spain and italy , its even further back , spains market is still more than 40% below its 2007 high and the ibex 35 is no higher today than in 1998 , so in the case of three pretty major european economies , bonds have absolutely hammered stocks for twenty years , now i dont know if this is down to the creation of a single currency union and a european central bank which many believe especially hurt the economy of italy and favoured others , germanys market has never been higher and bar the 2009 and 2012 heart attacks , has almost done as well as the u.s market since 2000

the ECB is a relatively new player in the markets so perhaps history doesnt teach as much with draghi and co in such an influential position nowadays ?

 

[Noahikman]

In everything you must have to take a risk. Just like the popular saying that goes: it is even risky not to take a risk. Business is one of the area you should always be ready to figure out new ways of doing things.