Most Popular ArticlesJeremy Siegel v. Zvi Bodie
July 21, 2009
Cumulative Returns of S&P500 vs. Bonds for 1 Year
If we now extend the projection period out to ten years, how do things look? The standard notion that underlies ‘stocks for the long run’ is that the risk of stocks under-performing bonds diminishes with holding time, which is partly true – but not entirely so. The chart below shows the same percentiles of cumulative return for a ten year period.
Cumulative Returns of S&P500 vs. Bonds for 10 Years
If we look at the median outcome (the 50th percentile), it is evident that stocks are likely to soundly beat both TIPS and nominal bonds over a ten-year period. The model suggests that the S&P500 will provide an additional 50% in total return vs. bonds (AGG) and 30% in total return beyond TIPS. This is the basis of the ‘stocks for the long run’ argument: The average gains on equities far exceed the gains on bonds.
The problem with simply using this logic as the basis for planning is evident when we look at the lower percentiles—the 5th percentile, for example. At the 5th percentile, the results show the S&P500 will under-perform TIPS to the tune of 130% in total return on the initial investment over a ten-year period. This means that there is a 1-in-20 chance (5%) that TIPS will out-perform stocks by an amount equal to 130% of the initial investment over a ten-year period. Even at the 20th percentile (a 1-in-5 chance), stocks will under-perform TIPS by 50% in cumulative return on the initial investment.Display article as PDF for printing.
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