Stocks for the long run?

[cremeegg]

Am i missing something here? I thought equities have out-performed all other asset classes over almost any reasonably long-term time frame?

Seems that is not true.

While Property returns are difficult to substantiate, I suggest that make all the above look, rather poor.

 

[Sarenco]

I thought equities have out-performed all other asset classes over almost any reasonably long-term time frame?

You thought wrong. That's the key takeaway from this thread.

 

[Sarenco]

While Property returns are difficult to substantiate, I suggest that make all the above look, rather poor.

Could you point us to anything that might help to substantiate that claim?

 

[cremeegg]

Could you point us to anything that might help to substantiate that claim?

Well as I said property returns are difficult to substantiate.

In post 39 above the period 1999 to 2020 was referenced.

in Dec 1999 the average house rice in Ireland was €127,000 (I can't really substantiate that but i am open to being corrected) Today its in the region of €250,000. Thats a return of just over 3% if my maths is correct. Add to that a yield of say 5% gives for a return of 8%. A different league from anything quoted above. A competent manager could easily manage a higher yield.

Of course if the yield was to be calculated on the original purchase price, which i think is more appropriate the return is higher again.

 

[Duke of Marmalade]

Steven those are interesting stats. But they are history.
Equities earned 3.03% p.a. over the last 20 years. They may well do that again over the next 20 years. They might do 6% p.a. or they might go sideways.
Bonds earned 4.25% p.a. over the last 20 years. With yields on long term bonds currently at 0%, near as makes no difference, it would be in defiance of the law of gravity for them to earn 4.25% over the next 20 years. I say to anybody uninitiated in these matters that those historic returns might give a flavour of the range of possible future equity returns they can't possibly describe the range of future bond returns.
I will repeat again what has not yet been refuted or accepted by others: historically bonds have provided a useful and rewarding diversification in a balanced retail portfolio. However, at current (artificial yields) they can't possibly fulfil that role from this point. They should not be in a retail investment portfolio.

 

[Protocol]

https://www.frbsf.org/economic-research/files/wp2017-25.pdf

The Rate of Return on Everything.

Abstract
This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long-run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive dataset for all major asset classes, including—for the first time—total returns to the largest, but oft ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new insights and puzzles.

Keywords: return on capital, interest rates, yields, dividends, rents, capital gains, risk premiums, household wealth, housing markets. JEL classification codes: D31, E44, E10, G10, G12, N10

 

[Gordon Gekko]

You thought wrong. That's the key takeaway from this thread.

I don’t think that’s accurate.

Equities “have out-performed all other asset classes over almost any reasonably long-term time frame”...we’ve seen a period where that hasn’t been the case...but note the use of the term “almost any”.

 

[Sarenco]

Equities “have out-performed all other asset classes over almost any reasonably long-term time frame”...we’ve seen a period where that hasn’t been the case...but note the use of the term “almost any”.

I would have thought that 20 years was a "reasonably long-time frame".

 

[Sarenco]

They might do 6% p.a. or they might go sideways.

Or they might fall.

Japan had the largest stock market in the world by market cap back in 1989. Japanese stocks have still to reach previous highs reached over 30 years ago.

The US stock market took 25 years to fully recover from the 1929 crash.

We simply don't know whether or not stocks will outperform bonds over the next 20 years.

I will repeat again what has not yet been refuted or accepted by others: historically bonds have provided a useful and rewarding diversification in a balanced retail portfolio. However, at current (artificial yields) they can't possibly fulfil that role from this point.

Bond yields fell (from historically low levels) during the most recent stock market correction. I can't see any basis for your assertion that bonds cannot diversify an equity portfolio going forward.

 

[Fella]

I don't worry so much what my actual return is , that is totally out of my control . Of course I would like it to be positive .

But I try to make the correct decisions.

When I choose investing in the stock market I make this choice because I believe it has he highest expected return .

Of course we only have data going back since the beginning of the stock market from what I can find is that bonds averaged 2.5% over 145 years V's stocks 6.9% .

I would expect stocks to out perform bonds over my lifetime investing but it may not but over multiple lifetimes people should expect a higher % returns from stocks . Of course each person only gets a limited time frame to invest in so it's down to chance , but your expected return is higher with stocks.

 

[Gordon Gekko]

I would have thought that 20 years was a "reasonably long-time frame".

No; that’s not what’s being said. Finding one 20 year period where that has not been the case does not disprove the fact that equities have outperformed over almost any reasonably long time frame. It’s essentially citing the proverbial needle in the haystack as something other than merely that.

 

[elacsaplau]

If we compare the 20 year return of the S&P against the US Aggregate Bond Index for the last 300 month ends (i.e. the last 25 years), there has only been 7 months where the Bond Index outperformed.

 

[Sarenco]

@Gordon Gekko

If you re-read the OP you will see that the outperformance of long-term US treasuries over a 20 year period is not without precedent.

And 20 years is not the longest period where long-term US treasuries outperformed US stocks (S&P500).

And that's just the US.

Long-term government bonds have outperformed domestic stocks for periods of 20 years or more in every major industrial nation.

In any event, I read the phrase "almost any reasonable long-term period" as referring to the length of the period - not the frequency of such periods.

For the avoidance of doubt, I am not suggesting that bonds have frequently outperformed stocks over long time periods - they clearly haven't. Over the vast majority of long-terms holding periods, stocks have outperformed bonds.

Nor am I making any prediction - implicit or otherwise - about the future performance of any asset class.

 

[Sarenco]

Well as I said property returns are difficult to substantiate.

Yes and it's notoriously difficult to accurately compare the return on a rental property with the return on an index tracker.

A few points missing from your comparison:-

• The acquisition and disposal costs for rental properties are significantly higher;
• Rental properties need to be maintained, insured and taxed (LPT);
• Running a rental property is a part-time job so you should really account for your time; and
• The greater proportion of the return on a rental property comes from rental profits which are generally more highly taxed than capital gains.

 

[DK123]

Re 6.9 % equity return on stocks over 145 years.Am i right to presume that this is adjusted for inflation i. e.buying power or real terms.If not then we are only kidding ourselves i think.

 

[Gordon Gekko]

@Gordon Gekko

If you re-read the OP you will see that the outperformance of long-term US treasuries over a 20 year period is not without precedence. Nor is 20 years the longest period where long-term US treasuries outperformed US stocks (S&P500).

And that's just the US. Long-term government bonds have outperformed domestic stocks for periods of 20 years or more in every major industrial nation.

In any event, I read the phrase "almost any reasonable long-term period" as referring to the length of the period - not the frequency of such periods.

For the avoidance of doubt, I am not suggesting that bonds have frequently outperformed stocks over long time periods - they clearly haven't.

Nor am I making any prediction - implicit or otherwise - about the future performance of any asset class.

My point is that such periods are extraordinarily rare. They’re almost black swan events.

 

[Sarenco]

My point is that such periods are extraordinarily rare. They’re almost black swan events.

According to Vanguard, stocks underperformed bonds about 18% of the time over 10-year rolling periods between 1926 and 2016.

Over 20-year rolling periods, stocks underperformed bonds over 4% of the time.

https://www.marketwatch.com/story/long-term-stock-investors-may-not-be-thinking-long-term-enough-2017-08-21

Of course, there is no guarantee that the next 90 years will follow a similar pattern.

 

[Gordon Gekko]

1/25...I like those odds...it would be interesting to see what has happened in the period immediately following those rare periods when bonds have won out. I would not like to own bonds from here. If I was a 60/40 man, I think the 40 would be cash.

 

[Sarenco]

If I was a 60/40 man, I think the 40 would be cash

While I can't predict the future, I can state as a certainty that while cash can dilute equity risk, it cannot diversify an equity portfolio.

Over the last 40 years -

Portfolio 1 comprised 50% US equities (total market) and 50% cash (3-month T-Bills), rebalanced annually. Annualised return of 7.87%, worst year -17.75%; maximum drawdown -26.83%.

Portfolio 2 comprised 50% US equities (total market) and 50% long-term (30-year) Treasuries, rebalanced annually. Annualised return of 10.68%; worst year -7.26%; maximum drawdown - 20.39%.

Over the same timeframe, a US equity (total market) portfolio had an annualised return of 10.66%,; worst year -37.04%; maximum drawdown; -50.89%.

So, over the last 40 years, the all-equity portfolio actually marginally underperformed the portfolio with 50% in long-term bonds. And the all-equity portfolio suffered some stomach churning drawdowns.

 

[Gordon Gekko]

I didn’t say that cash added diversification. My point is that if I wanted to reduce the volatility from here using a traditional 60/40 split, I’d have equities and cash. I don’t see how bonds can continue to surprise in a good way.