Stocks, Bonds, Bills and Inflation and Gold - Asset Class Performance
- updated through mid 2013
This article examines graphically the long-term historic performance
and returns of the
five major asset
classes of U.S. stocks, U.S. long-term 20-year government bonds, U.S. T-bills, Gold and the U.S. dollar. The results are truly enlightening and amazing!
The results are based on U.S. data from 1926 through mid 2013. The data source is a
well-known reference book called "Stocks, Bonds, Bills and Inflation"
edition. The book is published annually by Morningstar. (Ibbotson SBBI
Gold's long-term performance is from www.onlygold.com
You will see, of course, that Gold has done very well in recent years, but you
will also see it has not done very well over the whole period since 1926.
Note that most analysis of historic returns that you have seen is
horribly flawed in that it is
based on "nominal" returns before inflation. The graphs and figures
below are based on "real" returns after inflation. That is, this
analysis shows the real increase in purchasing power generated by each
investment asset class.
The graph below shows the long-term real (after inflation)
returns on large capital
U.S. stocks (The S&P 500 stocks), long term U.S. Treasury bonds (20
years), U.S. Treasury
Bills (30-day cash
investments) and the real value of a U.S. dollar after inflation) and Gold. The
return is illustrated by showing the growth over the years of a $1.00 invested
in each asset at the end of 1925.
Isn't that amazing? In real-dollar terms (adjusted for
inflation), large U.S. stocks
walloped long government bonds, short-term cash investments, Gold, and the dollar
itself in terms of total growth or return.
Each $1.00 invested in large stocks at the end of
1925 is now worth $312 in real purchasing power (87.5 years later at June 22,
2013). Compared to
large stocks, the other asset class values after 87.5 years are so low they barely
show up on the graph. (We'll fix that below) $1.00 invested in
long-term U.S. government treasury bonds for those same 87.5
years is now worth $8.94. $1.00 invested in T-Bills in 1926 is now worth just
$1.61. $1.00 invested in Gold for the 87.5 years is now worth $4.86. $1.00 left
literally in cash and not invested at all is now worth only 8 cents, due to the
ravages of 87.5 years of inflation.
Remember, all figures are after adjusting for inflation
(and so the above figures are the growth in real purchasing power) and assume
reinvestment of dividends or interest received and also assume tax-free
and no-fee investment accounts. (With taxes the growth would be less dramatic but would be
even more in favor of stocks given the lower tax rates on capital gains and
dividends. However since the Gold held for the 87.5 years would attract no taxes
and no transaction fees it would improve relative to stocks if those were taken
This means that if great Grampa had foregone just 1 case of beer
at the end of 1925 and
invested the money, in a tax-free account, in the S&P index of large stocks (and reinvested all dividends and
rebalanced to stay with the index over the years, and ignoring transaction
costs), his great grandson, as at June 22, 2013, could go out and buy
1 case of beer and still have money enough left to buy 311 more cases! This is
truly amazing and is really a case where you can in fact have your cake and eat
it too, if you just delay eating the cake and instead invest the money for a long
time. (Later I will show that there are some pretty good returns over 20 year
periods, so you don't have to actually invest for 87.5 years!).
This amazing out-performance of stocks (which beat
long-term government bonds by a factor of $312/$8.94 or 35 to 1, in the 87.5 years) has
occurred in spite of the two huge stock crashes that have occurred since the
year 2000, not to mention the stock crash of the great depression. The stocks
also beat Gold by a factor of $312/$4.86 or a staggering 64 to 1.
investment at $1.61 has just barely kept ahead of inflation. And a dollar
kept literally in cash as in a safe deposit box or under a mattress still is
the same dollar but it now buys only what 8 cents would have bought in 1926.
Cash in a safe deposit box is a wasting asset, over longer periods of time, in the presence of inflation.
The above graph which has a normal linear scale does a great job of showing
the huge difference in the ending portfolio values but unfortunately is distorted in
ways. First, the results from the earlier years are not really visible,
Second, it looks like the percentage rate of growth for stocks was increasing
toward infinity until 1999, and third it also looks like the early 2000's stock crash was
by far the
biggest market crash ever. Fourth, the very strong performance of
and Gold in recent years is obscured and is not even visible.
A logarithmic scale solves these problems
because a constant percentage growth appears as approximately a straight line and the
percentage gains in the earlier years are much more visible. Also the large
gains in Gold and bonds in recent years will become visible. Unfortunately a logarithmic
scale tends to somewhat obscure the huge differences in the ending values. When viewing
a growing data series it is probably best to view it with both logarithmic and
linear scales to better understand the results.
The same data presented in the above graph is presented below with a
In this graph (with the same data as above) you now have
to look more closely to realize the amazing extent to which large stocks (the
S&P 500) outperformed
bonds, T-bills, Gold and the dollar itself over the 87.5 year period. But this logarithmic scale allows you to view the
volatility over the years.
A constant slope on this logarithmic graph represents an
approximately constant annual percentage growth. By the nature of logarithmic graphs, a dip or
gain on this graph of a certain height represents the same percentage change
whether it happened in the 1920's or the 2000's. Any dip or gain visible on this
graph is actually large since a logarithmic scale tends to make even large percentage
changes look small.
This graph reveals that large cap stocks (the blue line) were much more volatile than bonds, particularly
from 1926 - 1932,
the mid 70's and in the 2000's to date. Again, remember that the graphs show
real returns, adjusted for inflation. It is Interesting that
the big stock market crash in 1987 is not apparent on this graph. The reason for
that is the fact that the graph here shows only year-end figures. The big crash
in 1987 was actually an event that happened within the year as stocks soared
until October that year and then crashed. On a calendar year basis U.S. large
cap stocks were
actually up slightly in 1987.
The Graphs below take the data above and break it out into 20 year periods
and reveal some very interesting insights into asset performance in different
periods. Note that the scales below are linear (as opposed to logarithmic) and that all the scales go to
$8.00 (A 700% gain, from the $1.00 starting point). By using the same scale it
is easier to visually compare the performance across the different 20 year
Long Treasury Bonds (the red line) look like the place to be in the 1926 - 1945 period. Stocks beat out
Bonds in the end but it was a rough ride indeed. The stock index returned 291%
after inflation in the 20 year period while the Treasury bond index returned
148% and Treasury bills eked out 22%. Gold gained 78% in real terms. The gain in
Gold was due to a U.S. devaluation of the dollar from 1/20th of an ounce of Gold
to 1/35th of an ounce of Gold in 1934. A paper
dollar in a safe or under a mattress gained in value during the depression due
to deflation and ended up losing just 1.5% in purchasing power over these 20
years. (And that was despite the devaluation in terms of Gold which
apparently had no impact on inflation inside the United States).
Notice that the dollar exactly tracked Gold (or
was it vice versa?) until 1934
which was when the U.S. government forced citizens to turn in their Gold for
$20.67 per ounce (so called expropriation, but they did pay for the Gold, but
the former Gold holders lost out on the appreciation in Gold that came soon
after it was expropriated) and
then the government effectively devalued the dollar by redeeming U.S. $35.00
dollars from foreign banks in exchange for one ounce of Gold as opposed to the
former $20.67. ($1000 therefore that used to "buy" 48.4 ounces of Gold
would now buy only 28.6 ounces due to the devaluation of the U.S. dollar in terms
The (relatively) unique thing about this time period was
the huge stock valuation bubble in the late 20's followed by a bursting in late
1929, which was then exacerbated by poor government policies that led to the
Great Depression. Note that the full extent of the stock bubble and crash is not visible in this
graph because it uses only year-end, rather than daily data.
Wow 1946 - 1965, what an incredible run for stocks!, while bonds and
T-Bills and Gold all failed to even keep
up with inflation. The dollar itself fell in real value due to inflation. It's interesting to note that stocks would be considered to
be much more risky, because they increased in a volatile fashion while bonds were pretty
flat and went nowhere. But if this is what people call risk, I'll take it! The
stock index returned a whopping 664%, after inflation, while the long bond index
investment lost about 21% and even so-called risk-free Treasury bills lost 16%
after inflation, over the 20 years. Gold lost 46% in real terms and the dollar
itself lost a similar 43%. Gold was tied to the dollar because the U.S.
government would (for foreign governments) redeem dollars for Gold at a fixed $35 per
ounce, hence the similar loss.
Whenever you look at long term data that shows the huge
margin by which stocks have beaten bonds, it is wise to remember that a huge
chunk of that came from the 15 years after 1949. An even larger chunk came form
the years 1982 to 1999.
During this period there was moderate inflation, in
contrast to the deflationary 30's. Long-term bond rates did not appear to reflect an
expectation of even moderate inflation. Stocks were able to keep up with
inflation, (in fact far out-paced inflation) while long term bonds got hammered due to
unanticipated inflation. The post war years also saw unprecedented gains in
productivity and the birth of the consumer society. This benefited stocks,
hugely. We should not expect these factors to be repeated in future.
This period saw an incredible run for Gold from 1972 to
1980. But, ouch! 1966 - 1985 was an ugly time to be an investor in stocks and
Note that the scale extends to $8.00 so that the graph can be easily and
properly compared to
the 1946-1965 graph above. These were the
inflation years and both stocks and bonds as well as treasury bills had a very hard time keeping up with high
inflation. The dollar itself lost an ugly 71% mostly due to the famous high
inflation of the 70's.It does not look like much, but stocks returned a total real portfolio gain
of 53% over the 20 years while long bonds lost 7% and Treasury bills made
20%. Both stocks and bonds were volatile and both had periods where they dropped
about 50%. T-bills were looking good with low volatility and reasonable returns
compared to the other assets.
But Gold, was the place to be. It continued to
track the dollar until President Nixon took the dollar off of the Gold standard in 1971 and then Gold soared in dollar terms. From 1972 to 1980, Gold did a LOT
more than keep up with inflation. At its peak it had risen about 500% in real buying power terms
even after adjusting for the
Next we look at the period from the end of 1985 through
the end of 2005.
$1.00 invested in large stocks at the end of
1985 was worth $5.29 at the end of 2005 for a gain of 429% in real after-inflation terms.
This was in spite of the stock crash of
the early 2000's. The gain in stocks from 1981 to 1999 was even larger than the
gains from 1949 to 1965. The 20-year gain for Long Bonds was $3.15 (215% gain) and for T-Bills
was $1.36 (36%
gain). Gold did not quite hold its purchasing power and was down 13% in these 20
years. Gold had fallen to 54 cents at the end of 2000 but then roared back to 87
cents at the end of 2005. The purchasing power of a cash dollar fell by 44%.
A very distinctive thing about the period of 1986 through 2005 was a huge drop in interest rates. This provided a huge boost to bond returns. It
also contributed to higher P/E multiples being justified for stocks, which
boosted stock returns. Another relatively unique thing about that period was the huge
stock valuation bubble of the late 90's which then deflated and then partially
In order to cover the 20 years ended
June 22, 2013, our next graph will significantly
over-lap the one just above.
In the 20 years from the start of
1994 through mid 2013 stocks once again beat out bonds. Bonds however were less volatile.
$1.00 invested in large stocks for the 20 years since the start of
1994 (end of 1994) was worth $3.16, in real terms, after
inflation at the end of 2012. For 20-year long-term government bonds the
figure was $2.59 and for Treasury bills $1.12. Gold at first did poorly but then
surged after 2001. $1.00 in Gold at the end of 1992 fell to just 67
cents in real purchasing power by 2000 but then roared back to and past $1.00,
peaking at $2.70 and ended up at $2.09 (for a 109% real dollar gain from the end
of 1993 through mid 2013). In nominal terms and based on daily data the rise in Gold
was higher from its lowest day but we are dealing with year end figures
here and adjusted for inflation. The purchasing power of a cash
dollar declined 37% in these 20 years.
Many analysts will use this last 20 years or so to conclude that a balanced
position between stocks, Bonds and T-Bills is always best. (And some will argue
for an exposure to Gold as well). I'm not convinced that balanced is
best for everyone. (But clearly a balanced portfolio turned out to be a VERY
good choice over these last 20 years or more.) If you are investing for at least 20 years,
and you have both the financial and emotional capacity to live with volatility, a good case can
made for a 100% allocation to stocks. I would reconsider though if I thought
that stocks were way over-valued at a particular point in time. I consider
stocks to be approximately fairly priced, to moderately over-priced at this time and not in a bubble.
government bonds are almost definitely at bubble levels (even after a recent
decline) and therefore it may be wise to
in spite of (actually, because of) their great performance in the past 20 to 30 years.
Finally we have one more graph. The next graph will cover
only the 13.5 years since the start of this new century. The end of 1999 also
happened to be a peak year-end level of the stock market. So, this next graph
will dramatically show how bonds and especially Gold and even T-bills have
outperformed the stock market since the year 2000. (Yes, Gold bugs,
Gold did shine in the 2000's at least until the end of 2012.)
Gold-bugs will be moderately pleased with this last graph since it shows that
Gold dramatically out performed stocks since the start of the year 2000 and also
dramatically out-performed 20-year government bonds. I changed the scale here to a maximum of
$4.50 to better show the out-performance of Gold and to better show the stock
declines. Those who have soured on stocks and who love gold always focus on the
poor performance of stocks since the year 2000. But, we should remember that the
world did not begin in the year 2000 and so it is a bit unwise to obsess about
stocks' poor performance since the last peak in the stock market to the exclusion of
all other time periods.
The above graphs demonstrate that the market looks very
different in different time periods and it is therefore very dangerous to make
assumptions about the relative performance of stocks and bonds in the next 20
Conclusions and Summary
By studying these graphs, you can draw your own conclusions about the
relative returns and risks of Stocks, Bonds, T-Bills and Gold. And you can see
the decline in purchasing power that occurs with actual cash held in a safe or
in a mattress for 20 year periods.
Note that these total return indexes ignore taxes (effectively
assumes a non-taxable account) and also ignore trading costs.
Stocks (the S&P 500) out-performed 20-year government Bonds and
T-bills and Gold by an absolutely
staggering amount over the last 87.5 years. Stocks therefore also did a far
superior job of protecting against inflation over the full 87.5 year period.
Stocks even out-performed over the 20 years from 1926 through
1945, in spite of the depression and crash of 1929-1932. Bonds also did reasonably well. T-Bills were basically the after inflation
equivalent of stuffing cash under the mattress. Gold did reasonably well in the
end but was highly volatile in terms of purchasing power. Actual cash in a mattress
basically rotted away.
For the 20 years from 1946 to 1965, stocks were far
superior. Bonds and T-Bills imitated mattresses (but did protect against
inflation, although not fully). The dollar itself and Gold which was tied to the
dollar both lost almost half of their purchasing power.
The 20 years from 1966 through 1985 were ugly all around
(unless one held Gold).
Stocks came out slightly ahead of bonds. Gold had very large returns as it was
de-coupled from the U.S. dollar and as Americans were again allowed to own it.
During the 20 years ended 2005, Stocks did very well but
with high volatility, Bonds did unusually well compared to stocks and with a lot less volatility.
T-Bills continued to only slightly out-perform
inflation. Gold slightly trailed inflation.
In the 20 years ended mid 2013 stocks
once again won out. Gold also did
very well over these 20 years but trailed stocks in the end.
Finally, if we focus on just the 13.5 years since the turn
of this new century, which also coincides with the 13.5 years since the last stock
market peak (bubble), stocks did very poorly in that period. Gold was the winner
by far. And 20-year government bonds also did very well.
A major learning from the above graphs is that the markets look
different in different time periods. It would be foolish indeed to base your
investment decisions solely on the results from the last 20 years or so. Those two
decades were unique due to a combination of low inflation and declining interest
rates. Long-term interest rates probably won't get much lower (and indeed have been
heading up) and so the next 20
years is sure to look far different than the most recent two decades. It would
be even more foolish to base your investment decisions on the poor performance
of the stock market since its bubble peak 13 years ago.
The above data and graphs focus on just four investment
periods beginning at the end of 1925, 1945, 1965, and 1985 (plus the
over-lapping period beginning at the end of 1993 and the 13.5-year period from
2000 through mid 2013). Given the
significant differences in the performance of stocks, versus bonds or T-bills
and Gold over those different periods, it is also very useful to look at the comparison over
all the possible 10 to 30 year holding periods beginning each year since the end
of 1925. My related article does this by graphing the average annual returns
over all those possible holding periods and attempts to answer the question of
whether stocks are really riskier than
Originally written Summer 2001 and updated annually and last updated
June 22, 2013
Shawn Allen, CFA, CMA, MBA, P.Eng.
President, InvestorsFriend Inc.