Stocks Vs. Bonds: The Long-Term Performance Data

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How do the bond market's total returns compare to stocks over time? Below, we examine the historical returns of stocks and bonds, along with the best performing segments of the bond market in the three-, five-, and 10-year periods. This article refers to 10 years of stocks from 2004-2014.

Stocks Vs. Bonds

During the 10 years (which ended on September 30, 2014), the S&P 500—a measure of performance for large U.S. companies—registered an average annual total return of 8.11%. In comparison, the domestic bond market, as gauged by the Barclays Aggregate U.S. Bond Index, had an average annual return of 4.62%. Bonds also underperformed developed-market international stocks, which rose 6.32% each year on average, and emerging market stocks, which returned 10.68% annually.*

While stocks have had better 10-year performance than bonds, it's important to keep in mind that bonds offer diversification and that the presence of bonds can help smooth out the volatility of the stock market. Also, there may be extended periods in which bonds outperform stocks, as was the case from 2000-2002.

Best Performing Bond Market Segments, 10 Years

One of the most common maxims in investing is that more risk equates to higher long-term returns. The 10-year results bear this out, as the best performing bond market segments were emerging markets, which had an average annual return of 9.28%, and high-yield bonds, which returned 8.67%. Both finished ahead of the S&P 500—even after stocks 32%-plus gain in 2013—as well as the bond market as a whole.

Below are the best performing market segments for the 10-year period, with the major bond and stock indices for comparison.

  • High-Yield 7.98%
  • Emerging Markets 7.78%
  • Long-Term U.S. Corporate Bonds 6.97%
  • Long-Term U.S. Government Bonds 6.78%
  • Investment-Grade Corporates (all maturities) 5.49%
  • Barclays U.S. Aggregate Bond Index 4.62%
  • S&P 500 Index 8.11%

Best Performing Bond Market Segments, 5 Years

The last five years of the period were a time of steadily improving economic conditions, a gradual increase in investors' appetite for risk, improving corporate earnings, and a broad rally in U.S. equities. It has led to outperformance for the bond market segments that are most sensitive to economic conditions: high-yield bonds, senior loans, and emerging market debt. It's important to keep in mind that these numbers were not repeated in the following five-year period:

  • Emerging Markets 10.70%
  • High-Yield 10.36%
  • Investment-Grade Corporates (all maturities) 10.57%
  • Long-Term Corporate Bonds 8.69%
  • Long-Term Government Bonds 6.99%
  • Barclays U.S. Aggregate Bond Index 4.12%
  • S&P 500 Index 15.70%

Note: Stocks' five-year numbers were up significantly in the final 12 months of the period, as the worst phase of the 2007-2008 financial crisis was no longer included in the data. Consider this evidence that even long-term performance numbers can be misleading.

Best Performing Bond Market Segments, 3 Years

The period-ending three-year stretch was similar to the five- and 10-year intervals in that it paid to take risks. Bonds with the highest sensitivity to credit conditions—high-yield and emerging markets—performed very well. Note, too, that longer-term bonds also performed very well. This is due to the sharp drop in bond yields that occurred in 2011-2012, so these returns are also unlikely to be repeated.

  • High-Yield 10.62%
  • Long-Term Corporate Bonds 6.85%
  • Senior Loans 6.66%
  • Investment-Grade Corporates (all maturities) 5.47%
  • Emerging Markets 5.03%
  • Barclays U.S. Aggregate Bond Index 2.43%
  • S&P 500 Index 22.99%

The Takeaway

It’s true what the legal disclaimers on investment brochures always say: past performance is indeed no guarantee of future results. However, these return figures tell us three things.

  1. Longer-term investors shouldn’t be afraid to take risks.
  2. Holding investments for the long term can smooth out the impact of even the worst market meltdowns (such as that which occurred in stocks and high-yield bonds in 2008).
  3. Bonds can play a meaningful role in long-term portfolio diversification. Keep this in mind as you construct your investment portfolio.

* Indices used are: U.S. large-company stocks: S&P 500, U.S. small companies: Russell 2000 Index, developed-market international stocks: MSCI EAFE, emerging market stocks: MSCI Emerging Markets, emerging market bonds: JP Morgan EMI Global Diversified Index, high yield bonds: Credit Suisse High Yield Index, long-term U.S. government bonds: Barclays U.S. Government Long Index, long-term U.S. corporate bonds: Barclays Corporate Long Investment Grade Index, TIPS: Barclays US TIPS Index, corporate bonds - all maturities: Barclays Corporate Investment Grade Index, Senior Loans: S&P / LSTA Leveraged Loan Index, Municipal Bonds: Barclays Municipal Bond Index.