A 200 year history of stocks, bonds and gold

 

In a study conducted in the U.S.A it was found that over a longer period of time Stocks outperformed all asset classes, followed by bonds then gold. Bonds were the most consistent while stocks and gold were erratic. Gold   never did enough to beat inflation while bonds did only slightly better. The following table indicates how stocks have been the best performing asset class over the past two centuries:

  

US Markets Nominal Return 1802-2001	Starting Wealth	Ending Wealth	Annual Return
Stocks	$1	8’800’000	8.32%
Bonds	$1	13’975	4.88%
Bills	$1	4’455	4.29%
Gold	$1	14.38	1.3%
US Markets Real Return 1802-2001
Stocks	$1	599’604	6.88%
Bonds	$1	952	3.5%
Bills	$1	304	2.9%
Gold	$1	0.98	-0.001%
Dollar	$1	0.07	-1.3%
US Markets Total Return 1925-2002
Small Company Stocks	$1	6’816	12.1%
Large Company Stocks	$1	1’775	10.2%
All Company Stocks	$1	3’311	11.1%
Long-Term Government Bonds	$1	59.7	5.4%
Bills	$1	17.5	3.8%
Inflation	$1	10.09	3%
US Markets Total Return 1982-2002
Stocks	$1	10.94	12.7%
Real Estate	$1	4.36	7.6%
Gold	$1	0.76	-1.3%

 

Source: Ibbotson Associates and Jeremy Siegel, Wharton Business School

 

 

Key Observations:

 

Ø       One dollar invested and reinvested in US companies since 1802 would have accumulated a total nominal return of nearly $8.8 million by the end of 2001

 

Ø       The inflation adjusted return of that dollar would have been early $600’000.

 

Ø       Inflation takes away $8.14 millions or 1.44% (8.32%-6.88%) of annual return. Clearly inflation is our biggest threat to creating wealth.

 

Ø       Treasury Bills fared slightly better by providing 3.5% and 2.9% of inflation adjusted real rate of return.

 

Ø       Over a period of 200 years Gold and the Dollar with real rate of returns at -.001% and -1.3% moved more or less in line with inflation. In other words you could not have become rich by buying these asset classes.

 

 

Inspte of the data provided above why is it so that the typical Indian fancies gold, bonds and real estate to equities? There are no clear cut answers and some soul searching that I did led me into the following conclusions:

 

1)      Since stock quotes are available on a day to day basis they manage to create maximum amount of fear and panic amongst investors.

 

2)     Liquidity in stocks is another reason for people to get out early. Almost all of us have ancestral homes running into more then 50 years and sometimes going as high as 70 to 100 years. The reason why we held on to them was there were no two way quotes available from 9.55 to 3.30 on all week days. Compounding works O.K for shorter periods of time, but creates magic over the long term. No wonder Einstein called it the eighth wonder of the world.

 

3)      Gold has become a symbol of emotional bondage we often relate to gold with a sense of historical nostalgia – the old wedding ring, the first bracelet that your father gifted you. These are things that we do not sell and the first stock that your father gave you was sold the moment it went up 20%.

 

So the point that I am initiating this debate on is that stocks are the only way to long term prosperity and it would make sense for investors to take some risk create more space for stocks in their asset allocation model the next time they sit with their Financial Advisor.

Edited by basant - 27/Jul/2006 at 4:18pm

Mr. basant, you have presented an excellent article.thanks for the same. My uncle invested 10000 Rs. on Bajaj Auto in 1962 and today that 10000 has become a 2.4 crores. I am ignoring dividends.No gold, bond or  would have created this much wealth.Real Estate may have been able to, however!!!!

I beleive we must organise some sort of an event on Balance sheet studying etc. Let the strength of our forum increase, I think you have a greater role to play in spreading educatyion....

You know when bad times come and go  no one sells these jewellery because there is no one to sell it through you do not want to involve your personel jeweller because that affects reputation and then at any given point in time there will be an unmarried daughter/sister so the general consensus would be at least we will be able to marry her off. There is another facet to the  problem a earring that was bought for Rs 20,000 will now fetch you Rs 15,000 the "bid ask" spread in jewellery is phenomenally high. Like I said you never think twice before sellig your stock because we think that markets could go down 10% or what ever. Why don't we do the same thing with jewellery when people want to sell  because they feel gold to go down to $ 550 at that time all of us would say this is for the bad time. Imagine holding something for the bad time that is just about managing to get you inflationa adjusted return!!!