Weekend Reading: Do Stocks Always Outperform Bonds?
This article appears as part of Casey Weade's Weekend Reading for Retirees series. Every Friday, Casey highlights four hand-picked articles on trending retirement topics and delivers them straight to your email inbox. Get on the list here.
I’m a longtime fan of Professor Jeremy Siegel and his book, Stocks for the Long Run, but new research from a retired professor named Edward McQuarrie extends Siegel’s analysis of stocks versus bonds performance; finding that the two may be closer in returns than originally thought.READ THE ARTICLE
Data revamped: Siegel showed the historical outperformance of stock over bond returns from 1802 to 2012 in the 2014 edition of his book; however, McQuarrie adjusted this data to begin in 1790, and for stocks, revised the pre-1871 data to include more stocks, cap-weighting returns and corrected survivorship bias. In short, he found Siegel’s data painted a “rosier” picture of stock returns than reality (5.9 percent versus 6.6 percent).
Further, in efforts to get a more accurate picture of investment-grade bond returns, McQuarrie utilized actual corporate bond prices, resulting in a return of 4.1 percent versus Siegel’s 3.6 percent. While his findings did confirm Siegel’s thesis that overall, stocks outperform bonds, in the first 150 years of his data, McQuarrie found that bonds and stocks performed nearly the same. Additionally, the relative performance of both investments greatly depended on the specific time period being analyzed.
You’re more than likely to see stocks outperform bonds over the long term; however, this goes to show that even during certain time periods within your “long-term horizon”, that’s not always a given. As such, a diversified portfolio with investments that mirror your financial and retirement goals is key.