In part 1 of this series, I established that stocks can have negative absolute returns over very long investment horizons such as 20 and even 50 years. In this second part of my series, I want to look at the results of Edward McQuarrie’s study for the relative return of equities vs. bonds.
Hopefully, McQuarrie in his studies integrated the fact that bonds are subject to survivorship bias too. As anybody holding German or Russian sovereigns from certain periods of the 20th century will unhappily remember.
Meb Faber has pointed out that emerging market bonds can overperform if invested in properly. One doesn't want to buy and hold EMs, though.
Same with stocks, I would say. Somebody (Tom McClellan?) said that no company whose chart had a positive trend ever went bankrupt. I'd say the same applies to indices. One doesn't simply buy and hold the Nikkei.
First, the entire article of McQuarrie is an attempt to expand and debias the data from DMS' Triumph of the Optimists. The DMS data has a significant bias toweards stock returns a nd likely overestimates the outperformance of stocks vs. bonds significantly.
Second, DMS only show cumulative returns over the last 100 years or so and there stocks outperform bonds but if you look closer there are significant long-term periods in between where stocks do not outperform bonds, which is what you see in the McQuarrie paper.
Matthew, Thanks for both Part 1 and Part 2. I've always heard that debt markets are bigger than stock markets. What I can find quickly shows Global Bond market cap at $133 Trillion, and Stocks market Cap (for 10 largest) at $89.5 Trillion.
And, clearly there's a lot of debt trading in REPO, CDRs, and other types of debt derivatives, that generally are only available to finance institutions and not to individuals.
Let's just posit that there's no "clear" evidence that stocks always outperform bonds, even on longer periods (horizons). Let's also posit that stocks and bonds are only two of many asset classes. What other (alternative) assets have comparable performance?
This is the most depressing thing I have read about markets. Thank God none of it is going to happen to you. There are true figures but why are we even considering long term investing in the Portuguese index or have been holding Russian bonds mixed into the discussion. The conclusions drawn are very odd. This just plays into the onslaught of fear sold by the media that has created a society where only 3% of people retire with over a million dollars. The main reason for this is people not having faith in long term stock investing. Here is what the S&P index looks like for 100 years. Anyone who has put 10% of their income monthly into the S&P has become wealthy. This is where the bulk of your money is going, not the Norwegian or Portuguese indexes or whatever oddball things brought up in the article and graphs. Here is what the S&P index looks like for the last 100 years. You draw your own conclusion.
Equity outperforms debt. This has always been the case. The chance that someone could go to an advisor or through self research could get to the conclusions here is zero. No one thinks these thoughts because there is zero chance someone would dig up 300 year old data, some from countries they haven't heard of and rely on charts that use terms like "multi-decade" which could mean 2 years or 20 years.
Hopefully, McQuarrie in his studies integrated the fact that bonds are subject to survivorship bias too. As anybody holding German or Russian sovereigns from certain periods of the 20th century will unhappily remember.
Meb Faber has pointed out that emerging market bonds can overperform if invested in properly. One doesn't want to buy and hold EMs, though.
Same with stocks, I would say. Somebody (Tom McClellan?) said that no company whose chart had a positive trend ever went bankrupt. I'd say the same applies to indices. One doesn't simply buy and hold the Nikkei.
Well, McQuarrie worked hard to reduce survivorship bias to a minimum.
So what about DMS data they publish in Credit Suisse Global Investment Returns Yearbook?
And The Rate of Return on Everything (2017) data?
https://imgur.com/a/ArnoAKR
They are not that long (since 1870/1900), but I don't see bonds being on par with equities in these.
First, the entire article of McQuarrie is an attempt to expand and debias the data from DMS' Triumph of the Optimists. The DMS data has a significant bias toweards stock returns a nd likely overestimates the outperformance of stocks vs. bonds significantly.
Second, DMS only show cumulative returns over the last 100 years or so and there stocks outperform bonds but if you look closer there are significant long-term periods in between where stocks do not outperform bonds, which is what you see in the McQuarrie paper.
Matthew, Thanks for both Part 1 and Part 2. I've always heard that debt markets are bigger than stock markets. What I can find quickly shows Global Bond market cap at $133 Trillion, and Stocks market Cap (for 10 largest) at $89.5 Trillion.
https://www.weforum.org/agenda/2023/04/ranked-the-largest-bond-markets-in-the-world/
https://www.visualcapitalist.com/the-worlds-10-largest-stock-markets/
And, clearly there's a lot of debt trading in REPO, CDRs, and other types of debt derivatives, that generally are only available to finance institutions and not to individuals.
Let's just posit that there's no "clear" evidence that stocks always outperform bonds, even on longer periods (horizons). Let's also posit that stocks and bonds are only two of many asset classes. What other (alternative) assets have comparable performance?
Real estate and infrastructure come to mind with performance somewhere between bonds and equities in the long run.
Thanks
This is the most depressing thing I have read about markets. Thank God none of it is going to happen to you. There are true figures but why are we even considering long term investing in the Portuguese index or have been holding Russian bonds mixed into the discussion. The conclusions drawn are very odd. This just plays into the onslaught of fear sold by the media that has created a society where only 3% of people retire with over a million dollars. The main reason for this is people not having faith in long term stock investing. Here is what the S&P index looks like for 100 years. Anyone who has put 10% of their income monthly into the S&P has become wealthy. This is where the bulk of your money is going, not the Norwegian or Portuguese indexes or whatever oddball things brought up in the article and graphs. Here is what the S&P index looks like for the last 100 years. You draw your own conclusion.
https://www.slickcharts.com/sp500/returns
Equity outperforms debt. This has always been the case. The chance that someone could go to an advisor or through self research could get to the conclusions here is zero. No one thinks these thoughts because there is zero chance someone would dig up 300 year old data, some from countries they haven't heard of and rely on charts that use terms like "multi-decade" which could mean 2 years or 20 years.