Unless a fixed income portfolio can generate income greater than you need to live, due to inflation you will need to either lower your standard of living from year or start taking principal guaranteeing that you run out of money eventually.

There’s still some use in looking at the direct return between two dates though. For example, if you plan to work for 40 years before retiring you might expect a lot of portfolio growth in the last decade because you’re starting with more assets, but if your portfolio return for the last 10 years is negative you won’t get any of that growth on you previous investments unless you can hold on to them much longer.

Doug: perhaps this is an indication that investors won’t be willing to pay prices that high in the near future?

Return Rate, %
2008 1988-2008
Cash 3.13 5.51
Bonds 2.85 6.91
Stocks -33.00 7.48

TEMPLE

It’s probably a good thing that I wasn’t investing 10 years ago but recent history has demonstrated many important investing lessons at other people’s expense. Those whose memory is longer than the market’s will do well.

Basil: bond and stock returns aren’t likely to converge much. As other comments mentioned reasonable investors should demand a higher return from stocks (unless you’re comparing stocks of stable companies with bonds that have a 10% chance of being repaid). This means they have to buy stocks at lower prices and sell at higher prices when possible. If a stock index has given you a return of 3% per year you probably won’t think that it’s time to sell and lock in your profits.

Doug: This effect probably had a lot to do with the last 20 years, but it doesn’t mean that it will keep driving returns down. People have “realized” this many times before, then forgotten it. Whether it happens slowly because lower returns don’t make as much news or quickly (which is probably the case after the last 6 months) the end result is that it gets easier to buy stocks. Whether the popularity of stocks are rising or falling seems to have an effect on the market over 10-20 years but it doesn’t look like it changes the long-run average much.

Brad: There are still long-term risks. For example, usually stock market returns are only calculated for the markets that still exist. It may not be a big risk but there’s few things that fit the definition of a “black swan” better.

It is true that anomalies in the stock market tend to get arbitraged away. But, the equity risk premium (or demanding a higher return for higher risk) isn’t an anomaly.

It isn’t even a recent phenomenon. In The Four Pillars of Investing, Bernstein shows that over the centuries, risk and reward have been a fundamental factor in all kinds of markets. After all, if investors expect stock and bond returns to be close, why would they take the risk of being in stocks?

17th Avenue: I’m not sure what you are referring to as “this remains true”. Are you referring to stocks outperforming bonds over the long run? If so, what I’m saying is that you get very good odds that stocks will do better than bonds over 20 years, say better than 96%, based on past experience. The longer the time horizon of an investor, the better the odds become.

I also disagree that if bonds outperform stocks over 30 or even 40 years, it would be a “black swan” event. While the US experience has been that stocks outperformed bonds always over 30-year holding periods, other countries have not been so lucky. IIRC, the Netherlands had one 40-year period in which bonds did better than stocks. It may be a “black swan” for US investors but investors in other countries have seen these swans before.