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Bonds Beat Stocks by Factor of 11 Times From 1981 to 2009
By JLP | April 14, 2009
I just read an interesting article by Paul Ferrell over at MarketWatch. Here’s the interesting part:
Bonds beat stocks by factor of 11 times from 1981 to 2009
Yes, and you’d have been 11 times richer. Listen closely to Shilling‘s analysis of the past 28 years. In his Insight newsletter he compares the performance of the S&P 500 stock index to the bond market. First he focuses on his “all-time favorite graph” comparing “the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity.”
His bottom line: “On March 31, 2009, that $100 was worth $16,656 with a compound annual return of 20.4%. In contrast, $100 invested in the S&P 500 at its low in July 1982 was worth $1,502 last month for a 10.7% annual return including dividend reinvestment. So Treasurys outperformed stocks by 11.1 times.”
Never heard of this fabulous alternative? Of course not. Wall Street can’t make millions in commissions this way. Instead, during this same 28-year period, Wall Street was using high-pressure sales gimmicks to sell its losers to America’s 95 million vulnerable investors.
Interesting. BUT….this eeks of data mining. I mean, why a 25-year treasury? Were 30-year treasuries not available back in 1981? I’m not sure.
I would also like to see Shilling’s numbers. Everyone knows that the longer the maturity of a bond, the more volatile that bond is. I would like to see how volatile such a strategy would have been over the years.
I have to say, I have a hard time believing that such a strategy would have led to a 20.4% compound annual rate of return over 28 years.
Call me skeptical…
Thoughts?
Topics: Investing | 19 Comments »
April 15th, 2009 at 1:54 am
I’m curious too. I’m subscribing to the comment feed for this post to catch replies – thanks for posing the question!
April 15th, 2009 at 3:36 am
Hmmm… This could just be an artefact of timing and looking at bonds when they are well priced vs stocks after they’ve been slammed. I’m sure you’d get very different results if you looked at the returns in mid-2007…
Also interesting to note that the gain is simply capital based for the bonds… That suggests a fair bit of volatility in the prices and I would suggest that there would be a large change in the return if you rolled over the bonds at a different time. Would love to look at the underlying data though!
April 15th, 2009 at 8:50 am
Interesting.. I’d imagine since we’ve had about a decade of QE the nominal price of the bond purchased in 1981 would rise significantly (since interest rates were at all-time highs in 1981).. bond prices are inversely proportional to interest rates, so a bond purchased in 1981 yielding 19% would appreciate significantly when interest rates started falling in the following years.. Very cherry picking with their data, I think.
April 15th, 2009 at 8:53 am
That comparison only tells me that there existed at least one time when a specific bond outperformed the S&P500… What I would like to see is a comparison of long term averages. Start at least 50 years ago and average the returns for a bond index and the returns for a stock index (including dividends) over 5, 10, 15, 20 and 30 year spans. Also include standard deviations so we have a measure of the volitility. That data is far more useful than any single comparison!
-Rick Francis
April 15th, 2009 at 11:19 am
The article said he took the high yield for the bonds in 1981 so there was some selectivity involved. In the early 80s, bonds had yields in the teens due to high inflation. Then you get the price appreciation in the bonds as interest rates went all the way to zero. That would give you a return of about 20%.
The point of the article is to show that stocks ain’t always the way to go as Wall Street likes to sell it since stocks create the highest profit margin.
Anyone that bought bonds in the early 80s and held has killed the stock market regardless of when they bought them. There may had been some volatility but prices basically went straight up. No more volatility than the stock market itself.
April 15th, 2009 at 11:26 am
The article said he took the high yield for the bonds in 1981 so there was some selectivity involved. In the early 80s, bonds had yields in the teens due to high inflation. Then you get the price appreciation in the bonds as interest rates went all the way to zero. That would give you a return of about 20%.
The point of the article is to show that stocks ain’t always the way to go as Wall Street likes to sell it since stocks create the highest profit margin.
Anyone that bought bonds in the early 80s and held has killed the stock market regardless of when they bought them. There may had been some volatility but prices basically went straight up. No more volatility than the stock market itself.
According to Bill Gross’ monthly newsletter, bonds have outperformed stocks over 10, 25 and 40 years. It is a bitter pill for stock fans to follow since it destroys the stocks are always the best investment for the long ter dogma that so many have accepted as fact.
April 15th, 2009 at 11:51 am
RA: Very true.. Everyone is selling something..
April 15th, 2009 at 11:55 am
‘the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity.’
It seems like everyone so far bypassed the reinvestment part. Did he take the bond prices every year for 25 years of reinvesting? Was the reinvestment done on the day the money hit the account? Lag time?
Interesting theory I’d really be interested in the math behind this study
April 15th, 2009 at 1:30 pm
Yes, it’s data mining but, even more importantly, it’s impossible for bonds to perform that well in the future.
See, in 1981, long-term treasuries were paying something like 15% while today they are paying only 3.67%. The astronomical gain came from a 11.33% fall in long-term rates. For this to happen again, an 11.33% decline in interest rates woudl result in a NEGATIVE 7.66% rate.
That’s not going to happen.
April 15th, 2009 at 1:36 pm
Allan,
At least Farrell mentions the fact that bonds aren’t likely to repeat what they have done in the past.
April 15th, 2009 at 2:02 pm
Alan Roth makes a good point. It should also be noted that stocks benefitted from the same decline in interest rates that bonds did over much of this time. In fact, the big run up in stocks started in the early 80s when PE ratios were in the single digits and interest rates were very high. This is also not going to be repeated and was a major reason for the great performance.
Govt bonds will likely not outperform stocks to any great degree if at all. But there is more than just one type of bond.
Holding corporate and municipal bonds could bring the same basic return as stocks with much less risk and possibly even outperform. Both of these assets classes have been beaten down just as stocks have.
April 15th, 2009 at 2:13 pm
I agree with RA: BBB and above corporates and munis are looking pretty good (GO munis if you can). High yield is still pretty dicey, but the valuations are compelling.
I certainly wouldn’t be buying treasuries right now.. Quite the opposite, actually.
April 15th, 2009 at 2:26 pm
Allan Roth makes a good point but fails to note that it is also true that stocks have benefitted from the same decline in interest rates that bonds have.
In fact, the stock run up began in the early 80s as well when PEs were in the single digits and interest rates was very high. The decline of interest rates was a major reason for the outstanding performance of stocks. This will also not be repeated in the future.
Govt bonds are not likely to substantially outperform stocks in the future.
However, there is more than one type of bond. It is quite possible that corporate and municipal bonds will perform just as well as stocks or better over the coming decades with less risk as both of these types of bonds have been beaten down just as stocks have.
April 16th, 2009 at 6:46 pm
You are correct that there is some data mining going on here, but that misses the more general point: over even very long periods of time, bonds CAN, and occasionally DO, outperform stocks.
Several commenters above have argued that the circumstances leading to the outperformance of bonds over the period in question are not repeatable. This may be the case. But it should also be noted that many investors hold equity-dominated portfolios after reference to a fairly limited time period, namely the half century after the second world war. One should not expect those conditions–an exceptionally long and peaceful economic expansion following the destruction of much of the world’s industrial capacity–to repeat themselves either.
The most important conclusion to draw from any data of this type is the importance of a well diversified portfolio, not just between Morningstar style boxes, but broadly across asset classes as well.
April 17th, 2009 at 9:12 pm
I’d imagine if we get high inflation and the bond yields rise again to double digits, at that time it could be a good idea to buy bonds. I think that right now is an exceptionally bad time for government bonds (except for maybe inflation-protected and I am not sure about those either). Government bonds are overvalued now because they are viewed as “safe haven” and because of fear of risk. Unless we get a deflationary cycle or another panic, I don’t see how these values can hold. Plus, at some point Chinese may decide that lending money to the US at these low rates is not such a hot idea…
I do agree with RA on municipal and corporate bonds. The yields came down a bit – the best time for those was last September – but they are still a lot better than on a CD. Last November I got a couple of issues of my state’s AA and AAA municipal bonds at yield-to-maturity of 5.3%: tax free coupon rate of 5% on one and 5.25% on another, but I bought below par. Medium-to-long term, but if the value drops, I am perfectly happy with waiting till maturity and collecting my tax free interest. I also got bonds from Goldman Sachs (last December, intermediate term, YTM – 8.8%) and Wells Fargo – the letter couple of weeks ago (4 years, 8.3% YTM). Now, these are below par because they are banks, but I don’t see either of these two defaulting. All of them are up now, municipals are selling above par now although not enough for me to consider selling (the yield still attractive). Banks still below par, but higher than what I paid for them. I will probably buy more of both municipal and corporate bonds to diversify.
One thing to consider, though, when comparing individual corporate and municipal bonds to CDs. CD interest is compounded. With corporate/municipal bonds you normally get interest paid to you as income, and the coupon value of the bond at maturity (unless you sell it sooner – for less or more). Of course, nothing prevents you from investing the interest into something else.
April 27th, 2009 at 7:06 pm
a specific bond outperformed s&p? so what, there are specific stocks that have gone up 10,000 times in that period of time
it’s all easy in the hindsight
May 30th, 2009 at 3:22 am
Bonds have been a strong source of income at a time when banks aren't paying their customers to keep money there and boards of directors are being very careful with their dividend policy.
August 24th, 2009 at 12:23 pm
If someone has said this before, I missed it. But, and this is a big but, the guy used clipped,or zero-coupon, bonds:-
“the results from investing $100 in a 25-year zero-coupon Treasury bond at its yield high (and price low) in October 1981, and rolling it into another 25-year Treasury annually to maintain that 25-year maturity.”
From the government bond site:-
“Zero coupon bonds are bonds that do not pay interest during the life of the bonds. Instead, investors buy zero coupon bonds at a deep discount from their face value, which is the amount a bond will be worth when it “matures” or comes due.
With the deep discount, an investor can put up a small amount of money that can grow over many years.
Because zero coupon bonds pay no interest until maturity, their prices fluctuate more than other types of bonds in the secondary market.”
Therefore, zero coupon bonds are extremely volatile, almost to the extent of options in stocks. And then he “rolled” them over to compound his high returns (the longer the time in the bond, ie 25 years instead of 24 years, increases the fluctuations and therefore, the net returns again.
Only a time traveler who knew the future would attempt such a risky investment tactic. Or some person with way too much time on their hands back testing the maximum return possible from any form of bonds investing.
This is about the worse example of data mining that I have ever had the misfortune to read.
October 1st, 2009 at 5:38 pm
Dave (or anyone else), won’t the annual roll over require tax payments?
If so, this is akin to some sort of snake oil salesman tactic.
Holding a great stock for 25 years like Chevron, Exxon / Mobil, McDonald’s, Disney, Nike or similar companies won’t require any taxes (except for dividends) until they are sold!