A few weeks ago, my Twitter feed stopped me cold with a bone-chilling tweet:



Investment researcher Meb Faber was the source. I grappled with the idea that stocks (the preferred long-term investment in most portfolios) had failed to outperform bonds (the preferred short-term investment) for most of the last four decades. And then Faber dashed off a second tweet:



Perspectives on the long term

Vanguard recently updated our principles for investing success. Principle number four is: “Discipline: Maintain perspective and long-term discipline.”

Long term can be a slippery concept. Is it ten years? Thirty? Or the 72 years between the presidencies of John Adams and Ulysses S. Grant? I considered the question from three perspectives—empirical, theoretical, and philosophical.


Empirical perspective

The 19th-century stock market data are interesting, but they’re spotty compared with the more comprehensive and extensively researched data on U.S. stock market returns since 1926. The table below shows how often U.S. stocks have outperformed U.S. bonds in the rolling 10-, 20-, and 30-year periods since 1926.

The first 10-year period, for example, begins January 1, 1926, and ends December 31, 1935. The second 10-year period begins February 1, 1926, and so on through May 2017. The analysis is based on total returns, including reinvested dividends, and not simply changes in stock prices, which may explain why the numbers don’t agree with those in Faber’s bone-chilling tweet.


How frequently have stocks outperformed bonds, 1926–2016?

How frequently have stocks outperformed bonds? 1926–2016

Source: Vanguard calculations based on index provider data.1


The empirical message is what we’d expect. Stocks have returned more than bonds over most long-term periods, but not always. The stock market’s longest shortfall stretched almost 23 years, from September 1927 to June 1950, from the eve of the Great Depression to the post–World War II boom. The tail end of the 2008–2009 financial crisis marked another 20-year-plus period of stock market underperformance.


Theoretical perspective

Finance theory assumes that we avoid risk and demand a reward if we do take it on. Stocks are riskier than bonds, a reality reflected in their greater price volatility. That risk is a feature, not a bug.

A stock investor’s claim on a company’s resources is secondary to that of creditors such as banks and bondholders. But once creditor claims have been paid, stock investors are entitled to most of what remains. This difference helps explain why stocks produce greater gains in the good times, but deeper losses in the bad. Theory suggests that those who are last in the capital structure shall be first in expected returns.


Philosophical perspective

Empiricism and theory get us only so far. They can’t subdue the doubt and fear provoked by a disturbing tweet. What if today is the start of another Adams-Grant period of underperformance? (We consider that a low probability.)

The most useful perspective on this dilemma is the philosophical. Doubt and fear are unavoidable, but they don’t have to be incapacitating. A few weeks ago, Vanguard founder Jack Bogle circulated a letter that he’d written to a young investor daunted by potential catastrophes. An excerpt:

My own total portfolio is about 50/50 indexed stocks and short/intermediate bond indexes. At my age of 88, I’m comfortable with that allocation. But I confess that half of the time I worry that I have too much in equities, and the other half that I don’t have enough. Finally, we’re all just human beings operating in a fog of ignorance and relying on our common sense to establish our asset allocation.


If you like your philosophy in tweet-sized bites, consider the financial wisdom of another distinguished Philadelphian.

More than 250 years ago, Benjamin Franklin wrote The Way to Wealth, a reminder that opportunity is not without challenge and risk. One of the most famous lines from Franklin’s essay? “There are no gains without pains.”2


I would like to thank Nicholas Merckling for his contributions to this blog.


1 For U.S. stock market returns, we used the Standard & Poor’s 90 Index from 1926 through March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Dow Jones Wilshire 5000 Index from 1975 through April 22, 2005; the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013; and the CRSP US Total Market Index thereafter. For U.S. bond market returns, we used the S&P High Grade Corporate Index from 1926 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 to 1975, and the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 through 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter.

2 Benjamin Franklin, 1758. The Way to Wealth. In: Jared Sparks, ed., 1836.
The Works of Benjamin Franklin: containing several political and historical tracts not included in any former ed., and many letters official and private, not hitherto published; with notes and a life of the author. Vol. 2. Boston, Mass.: Hillard, Gray, and Company. p. 92-103.