(2) The return and risk data in Chapter 2 in the book are as of 2006. All of the Figures in Chapter 2 (Figures 2-1 through 2-5) have been updated based on market data through 2018, and they are shown below. Under each Figure, I provide a commentary which compares the Figures based on data through 2006 with the Figures based on data through 2018.
Figure 2-1
Returns and Risks for Notes and Stocks
1926-2018 (%)
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Compound One-Year
Annual Return Range
Return 2/3 of the Time
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Notes 5.1 -5 to +13
Stocks 9.4 -10 to +29
The return data are lower than those in the book, but the risk data are almost the same. The returns for fixed income investments are lower, because I have decided to use the historical returns for 10-year notes, rather than those for 30-year bonds. Historical returns for the 10-year notes have been lower than those for the 30-year bonds. I made this change because 10-year notes are much more representative of the long-term focus of investors in fixed income investments in the marketplace today and in the future than 30-year bonds. The return for stocks is lower, because returns for stocks have been much lower in the last ten years than they were historically, and this has dragged down the long-term results somewhat.
However, the comments about Figure 2-1 in the book are still applicable.
Figure 2-2
Rolling 5-Year Data
1930-2018 (%)
Five-Year
Median Return Range
Return 2/3 of the Time
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Notes 5.2 2 to 9
Stocks 9.5 1 to 18
The return data for notes shown in Figure 2-2 are somewhat lower than those in the book, because of the change in the underlying instrument described above. The return for stocks is also lower, because of the below average returns in the last 15 years. However, the risk data are almost exactly the same as those in the book.
The comments about Figure 2-2 in the book are still applicable
Figure 2-3
Compound Annual Returns by Decade (%)
1920-2010
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Decade Notes Stocks Stocks
vs. Notes
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1930-1939 4.0 -0.1 -4.1
1940-1949 2.5 4.6 2.1
1950-1959 0.8 19.5 18.7
1960-1969 2.4 7.7 5.3
1970-1979 5.4 5.9 0.5
1980-1989 12.0 17.3 5.3
1990-1999 7.4 18.1 10.7
2000-2009 5.5 -1.0 -7.3
2010-2018 2.3 8.9 6.6
Best and worst in each column are shown in red
All the data before the 2000-2009 period for stocks are about the same as they are in the book. The data now reflect the results for notes, not bonds. Data through 2006 in the book have been updated to make a full decade through 2009. Because of the significant decline in the stock market from 2007-2009, the return for stocks for this decade declined from 1.1% in the book (through 2006) to -1.0% (through 2009).
As you can see, the performance for the 2000-2009 decade for stocks is the worst of any calendar decade in history. It is important to note, however, that this decade had a compound return which was only a negative 1.0%. Furthermore, this decade had two significant equity market declines, which is historically unusual.
The 8 full decades shown cover a variety of potentially significant negative developments - including a depression, a world war, a cold war, a stock market crash, major oil price shocks, and a period of very high inflation. Nevertheless, the worst performance for a decade for either notes or stocks over this entire period was an annualized return of -1% for stocks.
Note that the first eight years of the current decade have restored the normal relationship for returns and that stocks are outperforming bonds.
While it is impossible to forecast the negative developments which will affect markets in the future, these data give an investor comfort that while he or she is trying to get a reasonable return from a portfolio of notes and stocks, the downside in absolute terms is manageable.
An important thing to keep in mind is that notes and stocks have different investment characteristics, which is one of the reasons why they make sense in a long-term portfolio. For example, the conditions which make stocks do poorly are almost always ones which lead to notes doing well, and vice versa. The diversification of return patterns for these two asset classes itself leads to stability of overall investment results.
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