At a time of the phenomenal success of the new government bond issued by Belgium, a study by New York University caught our attention. The latter, which compares the returns of several asset classes between 1928 and 2022, highlights a colossal yield gap between equities and government bonds. A glimmer of hope for savers who have subscribed to the Belgian public loan: you can still implement a more effective long-term strategy!
Over the entire period studied, i.e. almost a century, the yield gap between stocks and bonds is colossal: on average, stocks generated 8,27% of annual returns, against 1,88% for government bonds. And this even taking into account the crisis of 1929 and the Great Depression. In absolute value, the figures are dizzying: if you had invested $100 in the S&P 500 in 1928, you would have recovered $625.000 in 2022… compared to only $7.000 for an investment in bonds!
Of course, few have the ability to invest for 100 years. But the differences remain impressive over shorter periods. Between 1973 and 2022, stocks returned 7,56% per year on average against 2,63% for bonds, and between 2013 and 2022, the ratio goes the same way to 10,78% against -1,91%!
Admittedly, the data presented in this study are American, and therefore denominated in dollars. But it would have been impossible to obtain data in euros over such a long period of time. Furthermore, the reference data used – the S&P 500 for equities and the 10-year US Treasury note for bonds – give a good indication of the spreads that would be observed on comparable asset classes in Europe.
Note that for the S&P 500, it is the total return that has been studied, i.e. including dividends. The annual return therefore takes into account not only the appreciation of the value of the shares, but also the systematic reinvestment of the dividends paid. Thus, the equity investor benefits from the phenomenon of compound interest, which generates exponential growth of his capital over the long term.
To calculate the annual return on bonds with a maturity of 10 years, the author of the study started from the coupon promised at the beginning of the year, to which he applied a correction linked to the value of the coupon offered the following year. As a reminder, the value of a bond is inversely proportional to the interest rate: if new bonds are issued with a higher coupon than those already in circulation, the value of the latter decreases. This is what happened in 2022 when central banks drastically raised rates.
Given the magnitude of the observed return gap between stocks and bonds, we had to use two different (logarithmic) scales for each asset class for our chart. What the curves essentially highlight is the evolution of each category: more volatile, equities move up and down, but with a clearly marked general upward trend. More stable, bonds are less prone to crises… but offer a low return over the long term.
We cannot repeat it enough: in the long term, there is no more rational investment than index investing. Index funds, or ETFs, exactly replicate the performance of stock indices like the S&P 500, and are otherwise inexpensive. Knowing that no one, not even Warren Buffet, is capable of beating the market in the long term, there is no reason to splurge… and even less to go headlong into short-term bonds whose yield is lower than inflation!