Investing in Equities Can be Less Risky Than Investing in Bonds
Few people would disagree if you were to say that investing in bonds is less risky than stocks. After all, a bond is a contractual agreement to exchange cashflows in return for interest, while a share in a company comes with no said guarantees. However, surprisingly, this isn’t always the case.
Jeremy Siegal is known as the wizard of Wharton and is also a professor of Finance at The Wharton School, a private Ivy League research university in Philadelphia. One of his seminal works studying long-term asset growth, Stocks for The Long Run, was first published in 1994. The book is currently in its 6th edition, having sold hundreds and thousands of copies worldwide.
Siegal found that over long horizons, equities presented lower risk as compared to bonds. Looking at 2 centuries worth of data (1802 to 2012), over thirty-year periods, the annual real stock return (returns after inflation) ranged from 2.6% to 10.6% while for long-term government bonds, the range was -2.0% to 7.8%.
The profound implication here is not that stocks did a good job of preserving your purchasing power, but that it also had lower risk when compared to bonds. When viewed in preservation of purchasing power then, bonds could be said to be riskier than equities.
Our own research on historical returns also showed us that for a global portfolio of equities since 1970, there has never been any 15 year period where stocks have registered a negative return no matter when you started investing.
There are many things an investor can do to manage risk. One of the most important tools they have is staying power, the longer your holding period is in the right assets, the lower your risk, and consequently, the higher your chances of success.
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