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Dispatches Stocks

Stocks Not Always Top Dog: A Challenge to Mean Reversion

Stocks don’t always beat bonds, and a 100% stock portfolio does not necessarily outperform a stock/bond blend.

by Eunice Kim | April 2024

Stocks don’t always beat bonds, and a 100% stock portfolio does not necessarily outperform a stock/bond blend.

With the advent of digital archives enabling the computation of U.S. stock and bond index returns as far back as 1792, research has shed new light on fluctuations in asset performance over multi-decade periods. This larger historical record improves upon previous research in several ways: It minimizes survivorship bias, it offers a more comprehensive market view by incorporating bonds to directly measure price changes, and it employs market-capitalization-weighted total returns for stocks. 

Figure 1. Variability of the Stock (Dis)Advantage Over 10-Year Holding Periods

Researchers discovered that asset returns fluctuate by regime, challenging the notion of stationary equity premiums (Figure 1). This thesis proposes that returns vary without periodicity or reversion, with stationarity existing within regimes but not persisting across them.

The augmented historical data shows that stocks can underperform bonds over holding periods of 20, 30, 50 or 100 years. Based on this, the researchers encourage investors to recognize the risk in stocks instead of assuming that a 100% stock allocation will always realize a higher return. A broader historical scope must be considered to develop informed investing strategies.

Source: “Stocks for the Long Run? Sometimes Yes, Sometimes No,” by Edward F. McQuarrie; Financial Analysts Journal, November 13, 2023.

Discussion

RICHARD O from CA posted over 2 years ago:

Argues for active management with a risk Management perspective. OK, so what strategy will do that while minimizing the number of trades and whipsaws and can be done with a reasonable time investment by retired folks? Answers???


JOHN L from NJ posted over 2 years ago:

Investing is about the future. Only if you expect the period 1802 to 1902 to repeat in 2024 to 2124 would it make sense to forecast bonds outperforming stocks. And then we need to consider the accuracy of the 1802 to 1902 records and the reputation of McQuarrie who is a retired marketing professor. There is serious disagreement with McQuarrie's interpretation of the historical stock market record. The repeat of the 1802 to 1902 period is unlikely due to the creation of the federal reserve and the change from gold backed currency to fiat money. Since 1914 the federal reserve has been creating ongoing inflation and manipulating the bond market so as to lower interest rates.


ROBERT A from NC posted over 2 years ago:

Maybe if I were investing in 1824, I'd buy what this little article is selling. But throughout my lifetime, my little buy-and-hold 100% stock portfolio has trounced the sort of model portfolios generated by academic geniuses and industry "experts." The only good I see in this article is that it helps keep bond salespeople from starving.


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