To boost returns, many pension plans turned to stocks, particularly after the 1974 ERISA reforms allowed them to take on greater risk – prudently. That strategy gained momentum in the 1980s and 1990s as academic research highlighted an historical equity risk premium. Stockholders were compensated for the risks they took in moving some of their holdings from bonds to equities.
But lately, the underpinnings of that research have come under question. How, after all, can you have a 200-year sample of stock versus bond market returns?
The data-torturing duel began with a column in the Wall Street Journal by Jason Zweig. He noted (as probably did a few stock investors) that, “As of June 30, U.S. stocks have underperformed long-term Treasury bonds for the past five, 10, 15, 20 and 25 years. Still, brokers and financial planners keep reminding us, there’s almost never been a 30-year period since 1802 when stocks have underperformed bonds.”
That sigh of disappointment was but a pause before loading a cannonade:
“There is just one problem with tracing stock performance all the way back to 1802: It isn’t really valid.… [T]the indexes relied on by Prof. Siegel exclude 97% of all the stocks that existed in the earliest years of the U.S. market, and include only the bluest of the blue-chip survivors. Never mind all of the canals, wooden turnpikes, rubber-hat companies and the other doomed stocks that investors lost millions on — and whose returns may never be reconstructed.”
Siegel, no slouch in being media-savvy, responded: “Zweig sharply criticizes my statements about long-term stock returns. He points out that “U.S. stocks have underperformed long-term Treasury bonds for the past 5, 10, 15, 20, and 25 years” and it is likely that 30-year under-performance is near. Well, Zweig can scratch 25 years as the market rally has pushed stocks ahead of bonds over that period. And if stocks return only 4 percentage points more than treasury bonds next year (which I consider extremely likely), he can scratch 20 years from his list as well.
“The last 30-year period in which bonds beat stocks was from 1831 through 1861. Furthermore, stocks, in sharp contrast to bonds, have never suffered negative after-inflation returns over any 20 year period or longer. That is quite a record, and Zweig does not disagree with either of these statements. Nor does he disagree with any of my analysis of the data over the past 130 years. Nevertheless, he claims that history cannot tell us whether stocks will beat bonds over the long run.”
We’ll have to wait a few years for this duel to end.