A few weeks ago, my Twitter feed stopped me cold with a bone-chilling tweet:

“US stocks outperformed bonds by 2.2% a year over the last 40. How much outperformance has come since 2009? All of it.”

Investment researcher Meb Faber was the source. I grappled with the idea that stocks (the preferred long-term investment in most portfolios) had failed to outperform bonds (the preferred short-term investment) for most of the last four decades. And then Faber dashed off a second tweet:

“Not cherry picking: Other periods of no outperformance for stocks include 20 years (1929-1949) and 72 years (1800-1871).”

Perspectives on the long term

Vanguard recently updated our principles for investing success. Principle number 4 is: “Discipline: Maintain perspective and long-term discipline.”

“Long term” can be a slippery concept. Is it ten years? Thirty? Or the 72 years between the presidencies of John Adams and Ulysses S. Grant? I considered the question from three perspectives—empirical, theoretical, and philosophical.

Empirical perspective

The 19th-century stock market data are interesting, but they’re spotty compared with the more comprehensive and extensively researched data on U.S. stock market returns since 1926. The table below shows how often U.S. stocks have outperformed U.S. bonds in the rolling 10-, 20-, and 30-year periods since 1926.

The first 10-year period, for example, begins January 1, 1926, and ends December 31, 1935. The second 10-year period begins February 1, 1926, and so on through May 2017. The analysis is based on total returns, including reinvested dividends, and not simply stock price changes, which may explain why the numbers don’t agree with those in Faber’s bone-chilling tweet.

Source: Vanguard calculations based on index provider data.[1]

The empirical message is what we’d expect. Stocks have returned more than bonds over most long-term periods, but not always. The stock market’s longest shortfall stretched almost 23 years, from September 1927 to June 1950, from the eve of the Great Depression to the post–World War II boom. The tail end of the 2008–2009 financial crisis marked another 20-year-plus period of stock market underperformance.

Theoretical perspective

Finance theory assumes that we avoid risk and demand a reward if we do take it on. Stocks are riskier than bonds, a reality reflected in their greater price volatility. That risk is a feature, not a bug.

A stock investor’s claim on a company’s resources is secondary to that of creditors such as banks and bondholders. But once creditor claims have been paid, stock investors are entitled to most of what remains. This difference helps explain why stocks produce greater gains in the good times, but deeper losses in the bad.

Philosophical perspective

Empiricism and theory get us only so far. They can’t subdue the doubt and fear provoked by a disturbing tweet. What if today is the start of another Adams-Grant period of underperformance? (We consider that a low probability.)

The most useful perspective on this dilemma is the philosophical. Doubt and fear are unavoidable. They don’t have to be incapacitating. A few weeks ago, Vanguard Founder Jack Bogle circulated a letter that he’d written to a young investor daunted by potential catastrophes. An excerpt:

“My own total portfolio is about 50/50 indexed stocks and short/intermediate bond indexes. At my age of 88, I’m comfortable with that allocation. But I confess that half of the time I worry that I have too much in equities, and the other half that I don’t have enough. Finally, we’re all just human beings operating in a fog of ignorance and relying on our common sense to establish our asset allocation.”

If you like your philosophy in tweet-sized bites, consider the financial wisdom of another distinguished Philadelphian.

More than 250 years ago, Benjamin Franklin wrote The Way to Wealth, a reminder that opportunity is not without challenge and risk. The most famous line from Franklin’s essay? “There are no gains without pains.”

I would like to thank my colleague Nicholas Merckling for his contributions to this blog.

[1] For U.S. stock market returns, we use the Standard & Poor’s 90 from 1926 to March 3, 1957; the Standard & Poor’s 500 Index from March 4, 1957, to 1974; the Wilshire 5000 Index from 1975 to April 22, 2005; and the MSCI US Broad Market Index through June 2, 2013; CRSP US Total Market Index thereafter. For U.S. bond market returns, we use the Standard & Poor’s High Grade Corporate Index from 1926 to 1968, the Citigroup High Grade Index from 1969 to 1972, the Lehman U.S. Long Credit Aa Index from 1973 to 1975, and the Barclays Capital U.S. Aggregate Bond Index thereafter.


All investing is subject to risk, including the possible loss of the money you invest.

Investments in bonds are subject to interest rate, credit, and inflation risk.