A recent study on stock and bond returns since 1934 aimed to determine whether investing in stocks and/or bonds back then would yield higher or lower returns than not investing. The research delved into nominal and real returns to make these comparisons. The analysis found that the correlation between stock and bond returns is quite low, indicating a diversification benefit for portfolios holding both asset classes. Portfolios divided evenly between stocks and bonds were found to have lower risks and higher return to risk ratios than portfolios of stocks or bonds alone.
The study also found that both stock and bond returns are negatively associated with higher inflation. Purchasing power returns for both bonds and stocks were lower in times of higher inflation. Bonds, in particular, exhibited a strong negative relationship with inflation, with a visual pattern to support this finding. The data showed that real bond returns tend to decline when inflation rises, as bond interest is fixed in dollar terms. In contrast, stocks also have a negative correlation with inflation, although less visually pronounced than bonds.
The research further revealed that both stock and bond returns vary significantly, with a wide range of quarterly returns. Histograms of quarterly returns illustrated that stock returns are more variable and riskier than bond returns. While both stocks and bonds had positive real returns over the ninety years analyzed, there were instances of negative returns during specific periods. Investors were advised to practice patience and understand their portfolio’s risks to weather the difficult times of negative returns in anticipation of positive returns eventually arriving.
The importance of maintaining patience in investing was emphasized, as successful investing is a long-term activity that may not come with guarantees. Understanding one’s portfolio risks and having confidence in their investment strategy during down times were cited as essential to achieving long-term financial goals. The study cautioned that past performance may not necessarily indicate future results and that any investment strategy should be carefully considered to mitigate potential risks and maximize returns.
Ultimately, the study highlighted the need for investors to be well-informed, patient, and prepared to navigate market fluctuations to achieve their financial objectives. The content provided in the study is for informational purposes only and should not be considered as investment advice or a recommendation regarding the purchase or sale of any security. Investors were reminded that securities investing involves risks, including the potential for loss of principal, and that there is no assurance that any investment plan or strategy will be successful.
