Stocks vs. bonds: An investment decision worth more than $10 million

But the historical evidence strongly suggests that just the opposite is true.

This is the first in a series of articles I think of as investor boot camp 2024. 

Check out: Investor boot camp 2023

Whether you’re just getting started and have relatively little money to invest or you’re already retired and you’ve been reading my articles for decades, there is something valuable here for you. 

For more than a quarter of a century, I’ve been updating some important articles that show how investors can obtain the premium returns they deserve for the risks they take. 

In the past, I’ve started the series by showing how investors can take advantage of 10 equity asset classes with especially good long-term returns. 

But this year, I’m starting with a huge decision that all investors must make: the choice between investing in stocks or bonds. 

Of course you don’t have to have all your money in either one, and most investors over age 50 should have a mix of both. But in order to help you think about this choice, we’ll compare historical results of all-bonds vs. all-stocks. 

The easiest way for you to follow along is to download two tables with lots of powerful information and catchy titles: J1a and J2a. Fixed Income and Equity: 1, 15 & 40-yr Returns (1928 – 2023)

Start with J2a below, which is all about bonds. 

As most investors know, a bond is essentially an IOU, a promise to repay a loan, plus interest. Because of this guarantee, the market prices of bonds don’t fluctuate as much as stock prices. 

My examples are based on bonds issued by the U.S. government, which has never defaulted on these obligations.

Table J2a has three columns. On the left, short-term government bonds; of the three, these are the least volatile, since they mature every 30 days. In the center, intermediate-term government bonds, typically maturing in five years. On the right, long-term government bonds, normally maturing in 20 to 30 years.

All the returns and growth numbers in these tables assume you bought bonds and kept reinvesting all the proceeds, including interest, every time they matured. And “years” refers to calendar years.

As you can see, for all the one-year periods from 1928 through 2023, short-term bonds had an average return of 3.3%. For intermediate-term bonds, the figure was 4.9%, for 30-year bonds, it was 5.2%. Over 96 years, an initial investment of $100 grew to $2,172 or $9,541 or $12,477, depending on the type of bond.

Though bonds aren’t especially volatile, you’ll see a wide variation in the best and worst one-year returns, with the spread especially wide for long-term bonds. (Here’s an article about bond prices and yields.)

Now that you know how to read the tables, you can see the comparable results for 15-year periods and 40-year periods.

The good news about bonds is that in the short term they are relatively safe, and their volatility is minimal over the long term. The bad news is that over that long term, their returns aren’t sufficient to create much wealth, especially after the effects of inflation (roughly 3% since 1928) and income taxes.

The alternative is the stock market, and for that we turn to Table J1a below. It’s very similar to the one we just looked at, but this time there are seven columns.

Each of the first four columns represents a major U.S. equity asset class. 

The top line shows that over 96 years, an initial $100 investment would have grown to $948,715 in large-cap blend stocks (essentially those in the S&P 500
SPX
). And note this: That is approximately 79 times as much as that $100 would have earned in 20 to30-year government bonds.

The next three columns show results for large-cap value stocks (LCV), small-cap blend stocks (SCB) and small-cap value stocks (SCV). Notice the $14.8 million for small-cap value stocks.

Briefly, large-cap stocks are those of very large companies; small-cap stocks are those of small companies, often unknown to most people. Value stocks are companies that for whatever reason sell at bargain prices relative to their profits. “Blend” funds combine value stocks with more popular (and pricier) growth stocks.

In one-year periods, none of these four asset class could avoid significant one-year losses. That’s the downside of owning stocks instead of bonds: In the short-term, anything can happen.

However, you’ll see that the worst-case losses were much more palatable in 15-year periods, and there were no 40-year losses at all. 

 You could put all your equity holdings into just one of these four asset classes, but history suggests you’ll do better with one of the three combinations in the columns to the right. 

The U.S. 4-Fund portfolio has clearly been a long-term winner, as you can see at the very top of Table J1a. That four-fund combo, for example, turned an initial $100 into $4.31 million, or 4.5 times as much as the S&P 500 did by itself.

If you are truly in this for the long haul, you might find it interesting that the very worst 40-year return for the 4-Fund portfolio was 10.8%, very close to the average 40-year return of the S&P 500 (11.0%).

If you’re old enough to be reading this, it’s unlikely you’ll invest in anything for 96 years. But those 96-year returns aren’t as preposterous as you may a think. 

About a year and a half ago, my wife and I invested some money for our newborn granddaughter for the rest of her life. Current actuarial tables indicate that about half the people born this year are likely to live to at least 103. 

Read: How $10,000 will help my newborn granddaughter have a better retirement

So it’s possible that a mere $100 set aside today for an infant could grow to $5 million or more. 

In the rest of this investor boot camp 2024 series, we’ll discuss these asset classes and portfolio combinations in detail. You’ll learn how to combine stocks and bonds in order to control your level of risk, how to safely take money out when you retire, and much more. 

For a more detailed discussion of today’s topic, check out my podcast, “The $20 million decision.”

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of “We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement.”