Would investors been better off owing long term US Treasury bond than owning common stocks?
If we ask a question “Which investment, large-cap US stocks
represented by S&P 500 index and long term US Treasury bonds (20-year
maturities or longer) provide a better return over last two decades or which
investment choice investors taken have better chance to be ahead?”, to a
regular investor or even an investment professional, most likely we would get
the answer, “Stock market, of course.” It is reasonable and expected as the
U.S. stock market has gone through the longest bull market run in history, and
the domestic stock market just registered the 10th anniversary from the bottom
of 666 S&P 500 index point on March 9, 2009. Since then, the S&P 500
index has quadrupled as of the Q1 (=2834/666), we have witnessed the rising of
new internet giants, like FB and NFLX. The stock market has made many investors
happy if they started to accumulate the positions and stayed the course and
even better if one could manage to navigate the peak and trough to time the
right entry and exit points.
For most investors, however, the answer may be not that
clear-cut and evident at all.
First, let’s look at the relative performance differences
between S&P 500 Total Return and Barclays US Treasury 20+ Total Return on
the calendar years basis and see how many years the stock or US Treasury Bond
index are better than the other. Here is the chart representation of the
performance differences between these two major assets.
Well, it turns out that if an investor owns S&P 500
index over last two decades (including the 1st Q this year) through the thick
and thins, he or she would be a better offer than owning US long term bonds 11
out of 20 years. The outcome is probably not many people expected or would like
to believe, but it is much better to be in stock investors in term of
possibilities of losing money on a given year, and certainly fit the general
perception that stock market is more likely provide MORE frequent better
return. Another takeaway from data (chart) is S&P 500 index did remarkably
better since the Great Financial Crisis of 2008, in the last decade, S&P 500
outperformed US long bond 7 out of these ten years, a much better chance to
stay ahead.
Second, we exam the asset returns for the period. Here is
the comparison of an annualized compound return of the S&P 500 index and US
Treasury long bond index for the last two decades.
It may be quite surprised to notice that the most famous US
large cap stock index, S&P 500 index would deliver 3.34% price return
annually over the two decades, less than ½ of 6.97% US long term bond index
return for the period. Even including the dividend, the S&P 5000 index
would churn out 5.27%, 1.7% below the long bond index. So investors would be better off staying with
long term US treasury bonds than investing with the stock market for the last
two decades in terms of investment returns (volatility and risk are different
subjects).
Since 20 years may be a little bit too long term for some investors, what about 10 years? How do these two assets fare in this decade (once again counting Q1 2019 as a whole year)?
The S&P 500 index performance of 9.8% price return and
11.9% total return probably what we are most familiar and expected in our memory
since we have been bombast constantly with the notion of double digit gains in
stock market. If we pick last decade as the time frame for to evaluate
performance between stock and bond, the answer to the question would be
entirely different from the mentioned two decade time frame; investors would be
much better off by investing in the broad stock market as S&P 500 index
provided almost 12% total return annually over last ten years compared to a
mere 6.4% for US long term bond index.
Barclays US Treasury 20+ index, was created in 1976, if we used the whole data series and compared to the broad market stock index, S&P 500 index. Below are the annualized compound returns for the two asset.
As it turns out that we used last 44 years as our fixed
investment horizon, the stock market and long term US Treasury bond delivered
almost exactly the same return about 8.2% if we compared the stock price return
to the bond total return. The “extra” return stock investors got over US
Treasury bond is the dividend income about 3% over the 44 years span. However,
unfortunately, if one has not been a passive index or dividend conscious
investor, the income component of one’s total realized return would be likely
less, and there are great possibilities that the stock portfolio may unperform the old dreary long term US bond portfolio.
The question of which investment choice would be better is not
ease as sound. Investment horizon or time frame most frequently is the most
critical factor in determining investment outcome and decision making. The
investment decision and conclusion may be correct and right for a fixed time
frame, and it could be easily turn out to be totally opposite and wrong under a
different investment horizon. Adjusting one’s risk profile based one life cycle
as well as macroeconomic conditions and trying not to be distracted by the
market hyperbolic bombardments probably would be the primary foundation to
achieve long term investment goals for most of the regular investors.