Wednesday, December 17, 2008

Stocks Win in the Long Run, but how Long is the Long Run.

My father cc’d me on an e-mail to my grandfather about stock returns. My grandfather had asked what his return for his retirement funds would have been over the last 30-40 years, if he had been in bonds or CDs.

My father’s response
“Suppose we look at 40 years, i.e., 1968. Prior to this year, stocks had grown at a rate such that $1,000 put in in 1968 would have grown by a factor 48 at the start of 2008. If we reduce that by 30 %, the amount the Dow has fallen this year, then the $1,000 would have grown by 33.7 times. Bonds, however, have grown 17.4 times from 1968 till the start of 2008. (I assume little change from the start of 2008 till today.) So, stocks have performed about twice as well over 40 years, even with the recent downturn. The gap is over 2:1 if we look at the last 30 years. But, over the last ten years, bonds would have returned a compound 50 % while stocks have actually lost ground.”

I think the most interesting thing is the last sentence. $1,000 invested 10 years ago in bonds would have returned $1,500 (not accounting for inflation), but the stocks actually lost money.

Is 5 years no longer the stock versus bond horizon? I wonder about investing for college. Vanguard (a well run and managed investment service), offers three options for age targeted college funds. A conservative option, which has no stocks after age 11, a moderate which stops at age 15, and an aggressive one that goes with 25% stocks until 18.

I would still lean toward the aggressive option if the amount in the college savings plan is enough to pay for college, but maybe that’s because I finished most of school before the dot-com bubble burst.
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