Week 16 Day 3: The Historical Scoreboard: Stocks Win by a Landslide

$10,000 invested in stocks in 1926 would be worth over $100 million today. The same $10,000 in bonds would be worth roughly $1 million. Stocks beat bonds by 100x over a long time period. The gap comes from that extra 5% per year, compounded over decades. For long-term wealth building, stocks are the clear winner.

Ibbotson Associates data (1926-2023): Large-cap U.S. stocks averaged 10.3% annually. Long-term government bonds averaged 5.1%. Treasury bills averaged 3.3%. Inflation averaged 2.9%. In real (inflation-adjusted) terms: stocks returned 7.4%, bonds returned 2.2%, and T-bills returned 0.4%. A dollar in 1926 is worth about $14 today (inflation). That same dollar in stocks grew to about $12,500. In bonds, about $130. In T-bills, about $22. The equity premium is the most well-documented phenomenon in financial history. But it comes with a cost: stocks are volatile. Stocks declined 30%+ four times (1929-32, 1973-74, 2000-02, 2007-09), with the worst being an 83% decline during the Great Depression. If you sold at the bottom in any of those crashes, you locked in devastating losses. If you held, you recovered every time. Time horizon is the determining factor.

Siegel's 'Stocks for the Long Run' documents that over every rolling 20-year period since 1802, stocks have outperformed bonds and bills in real terms. The longest stock underperformance was the 17-year period 1966-1982. Even including that worst case, the annualized real return was approximately 0% (not a loss, just flat). The explanation for the equity premium puzzle (Mehra and Prescott, 1985) -- why stocks earn so much more than theory predicts -- remains debated. Proposed explanations include myopic loss aversion (Benartzi and Thaler, 1995), disaster risk (Barro, 2006), and long-run consumption risk (Bansal and Yaron, 2004). The practical implication is clear: any money with a 15+ year time horizon should be predominantly in stocks. Dimson, Marsh, and Staunton's global database (23 countries, 1900-2023) confirms the equity premium is not unique to the U.S. -- global equities returned approximately 5.0% real versus 1.7% for bonds. However, the U.S. was the top-performing major market over this period, so using only U.S. data overstates expected future returns.