Assessing Stocks and Bond Returns Over The Past Century

In the world of investing, it becomes clear that history holds significant importance. Astute investors meticulously analyze the track record and historical data of potential investments before committing their funds, assessing their potential for financial growth.

When it comes to investments, stocks and bonds are the two most popular asset classes among serious investors seeking passive financial growth. Although relatively uncommon, there have been instances where both stocks and bonds have generated negative returns for investors. Since 1926, stocks have experienced negative returns approximately 28% of the time, while bonds have seen negative returns around 15% of the time.

A portfolio consisting solely of stocks yielded the highest average return at 10.3%. However, it also exhibited the widest range of returns, with a low of -43% and a high of 54%. Such volatility represents a high-risk strategy that many investors would find difficult to tolerate.

Conversely, a portfolio comprised solely of bonds typically yields an average return of 5.3%. Bonds can serve as a safeguard against losses as they often move in the opposite direction of stocks.

That is why, as a rule of thumb, financial advisors often advocate for a 60/40 investment strategy. This strategy suggests that investors allocate 60% of their portfolio to stocks and the remaining 40% to bonds. Such diversification, encompassing both growth and income, has been proven to be a safe approach for investors to grow their money without assuming excessive risk. It typically yields an average return of 8.8% per annum.

While we discussed the instances in which stocks or bonds have posted negative returns for investors, even rarer are the instances in which both stocks and bonds reported negative returns in the same year. This occurrence has only happened 2.4% of the time (or twice since 1926), further reinforcing the credibility of the 60/40 rule.

Regarding the years when both stocks and bonds reported negative returns, the most recent occurrence was in 2022. Apart from that, the only other year this happened was in 1969, characterized by rising inflation and increasing interest rates.

Based on this analysis, we can conclude that higher interest rates have the potential to negatively impact both stock and bond returns due to their influence on future cash flows. When the economy is uncertain and interest rates exhibit volatility, investors tend to be more risk-averse, leading to potential decreases in stock and bond prices. Conversely, in a positive economic environment, investors may be inclined to take more risks, potentially driving up stock prices.

There is no doubt that we are currently experiencing financially volatile times, characterized by significant and abrupt fluctuations, along with the ripple effects of higher interest rates that impact our returns. However, historical data from the past century demonstrates that these cycles of high interest rates are transient and eventually subside.

That is why, for investors who achieve long-term success, the best course of action is to remain calm and patient, holding onto their stocks and bonds, and await the subsiding of tumultuous times, returning to a more stable period. For further insights into investing and sustainability efforts, particularly in Malaysia where we are based, stay tuned to PEGH. We regularly cover investment news, ESG initiatives, and provide reliable financial advice to help you plan for your future retirement.




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