The Buy and Hold Apocalypse

Our data for today was provided by Stocks, Bonds, Bills & Inflation, an Ibbotson Associates piece. It looks at the returns by decade of the S&P 500, small company stocks, bonds, T-bills and inflation. Obviously the data from the '30s and the '70s are going to provide the two worst sets of returns. The 1930s was a period of disinflation brought on by a worldwide depression and strict adherence to the gold standard. A curious feature of the gold standard was that it caused periodic bouts of systemic disinflation as the value of all sorts of goods and services decreased. The 1970s was a period of rapidly accelerating inflation initiated by a surge in the prices of various commodities, including but not limited to oil.

In the 1930s, the S&P 500 returned 0.0% while small company stocks notched a 1.4% gain. In the same period, long-term bonds rose 4.9%, T-bills were up 0.6% and inflation was -0.2%, signaling disinflation. The returns of stocks for the 1930s were positive when adjusted for inflation and the returns of small company stocks were superior to those possible in T-bills, our stand-in for money markets. Without a doubt, for that decade long-term bonds were the champ. However, for the next three decades long-term bonds dramatically underperformed all stocks and their total return even after the 1940s were done was about par with the S&P 500 and below small stocks.

In the 1970s, the S&P 500 returned 5.9% while small company stocks produced 11.5% gains. Accelerating inflation didn't help blue chips, but actually did not put as much of a damper on small company stock returns as many in the press would lead you to believe. For the same period, bonds produced 5.5% gains, T-bills yielded 6.3% and inflation was 7.4%. During the 1970s, the inflation-adjusted returns of the S&P 500, bonds and T-bills were all negative -- and about the same. The inflation-adjusted returns of small stocks were positive. These two sets of data represent the absolute worst returns in a decade for stocks and despite all of the yammering about massive corrections, they really do not seem all that bad. If you go a step further and say that the worst returns for stocks since 1920 were in decades characterized by disinflation or rapidly accelerating inflation, things suddenly look even rosier.