An article I’ve loved and often linked to is Dana Anspach’s piece on the rolling returns for various asset classes over different time periods. I think the article can best be summed up in 2 of the included charts:
In a given year, bonds and treasuries are indeed very safe with very little incidence of losing more than a few percent of value in a year. Equities over the 1 year period have wildly variable with higher highs and lower lows. In the worst-case single-year return over Dana’s sample, intermediate bonds were down 1.7%. The S&P 500 on the other hand was down almost 45%.
However, when annualizing returns over a 20-year time frame, the worst intermediate bond returns were 4.2% per year. The worst S&P 500 returns were 6.4%.
The punchline here is that while bonds are indeed safer in the short term if you have a long enough investment horizon, equities are a much better choice not only in terms of average return but also in terms of possible losses.
I decided to update this study on the S&P 500 for a larger window. The period between January 1935, and January 2021.
Overall, the trend from Dana’s original article still holds true. Returns over a 1-year period are wildly variable, but as we annualize returns over longer time periods, the range of returns becomes more and more narrow.
Sadly though, her point of the lowest annualized returns over a 20-year period being 6.4% no longer seems true. In fact, the lowest annualized return over that period is a loss of 3.6%.
That being said, expanding to a 30 year period does bring us back into the “always positive” territory, albeit at a lower return of 2.13%.
Hopefully, the result of all this is that investors with long time horizons can have confidence in planning for retirement with large allocations to equities knowing that more often than not, they could assume long-run annualized returns of about 6%.