Investors are understandably frustrated that stock returns have been meagre or negative over the past decade. But, if investors are wondering if they should abandon stocks, then, as Thicken My Wallet pointed out in a recent post, investors need to find a better asset class than the one they are abandoning. Which raises the question: Is there any asset class better than stocks?
We’ll turn to the historical record found in Triumph of the Optimisits for the long-term record on the traditional alternative to stocks — bonds. Out of the ten non-overlapping 10-year time periods from 1900 to 2000, Canadian stocks did not have a single period with negative real returns. Canadian bonds and bills, on the other hand, had four losing periods. In the US market, stocks had two periods with negative returns, bonds had five and cash had two. The markets in the UK have a similar historical record: two negative periods for stocks but five for bonds and four for bills.
The historical record shows that investors get better odds of winning periods with stocks than bonds and supports the notion that long-term investors should have a majority of their portfolio in equities. Other alternatives like real estate do not have a sufficient long-term history to compare with stocks.