Stock Investing vs Bond Investing Risks Over Time

We all know that stocks are riskier than bonds. The March, 2020 stock market plunge was the latest example of that.

But, episodes like that obscure a longer-term issue. Consider the somewhat confusing chart below from the latest edition of Jeremy Siegel's excellent book, Stocks for the Long Run.

For different length holding periods (1, 2, 5, 10, 20 and 30 years), this chart shows the best and worst annualized real (after-inflation) returns for U.S. stocks, bonds and T-bills (short-term bonds). So, for example, you can see that for a 1-year holding period, stocks had a best +66.6% year and a worst -38.6% year. Bonds offered less upside but also a lot less downside.

But, look at the return extremes for 5-year holding periods. Stocks worst such period -11.9% is pretty close to the worst such period for bonds at -10.1%. For 10-year holding periods and beyond, the worst stretches for stocks are better than the worst period for bonds and T-bills. You read that right. For 10 years or more, stocks have produced less downside while providing greater upside than bonds or T-bills.

All of this is a reminder that stocks are intended to be a long-term investment despite their offering daily liquidity. But, over periods beyond 5 years, stocks are about the same risk level or less risky than bonds in terms of their historic returns.

Remember, Siegel's work analyzing U.S. stock market data back through 1802 shows that stocks have produced annualized returns of about 6.7% above the rate of inflation compared with 3.5% and 2.7% respectively for bonds and T-bills.