Abstract
Academics, practitioners and investors essentially agree that in the short term stocks are riskier than bonds. Which of these two assets is riskier in the long term, however, is controversial. This short article explores this issue by assessing long-term risk as suggested by Warren Buffett; that is, with the probability of losing purchasing power. If risk is viewed this way, a comprehensive data set spanning over 19 countries and 110 years clearly suggests that in the long term stocks are less risky than bonds.
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Notes
The semideviation with respect to a benchmark B (Σ B ) is given by Σ B ={(1/T)Σ t Min(R t −B)2}1/2, where R denotes returns, T the number of observations, and t indexes time. Throughout this article the benchmark used is 0 per cent. For a practical introduction to the semi-deviation, see Estrada (2006).
These data are described at length in Dimson et al (2002). Equity markets are represented by widely diversified portfolios of stocks, and bond markets by medium/long-term government bonds.
A similar analysis, considering more holding periods but only for the US market, can be found in Siegel (2008), chapter 2.
Although holding periods shorter than 20 years can hardly be thought of as the long term, for the sake of completeness Table A1 in the appendix reproduces the analysis in Table 2 considering holding periods of 5 and 10 years. Those results do not affect (in fact, reinforce) the conclusions just drawn.
References
Buffett, W. (2012) Why stocks beat gold and bonds. Fortune, February 9, http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/.
Dimson, E., Marsh, P. and Staunton, M. (2002) Triumph of the Optimists. Princeton: Princeton University Press, NJ.
Estrada, J. (2006) Downside risk in practice. Journal of Applied Corporate Finance 18 (1): 117–125.
Estrada, J. (2012) Stock, Bonds, Risk, and the Holding Period: An International Perspective. Working paper, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1971095.
Siegel, J. (2008) Stocks for the Long Run. New York: McGraw Hill.
Acknowledgements
I would like to thank Jeremy Armitage, Edwin de Bruijn, Ignacio Peña, Jack Rader, Raghu Rau, Rawley Thomas and Bill Ziemba for their comments. Sergi Cutillas provided valuable research assistance. The views expressed below and any errors that may remain are entirely my own.
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1has an M.S. in Finance and a PhD in Economics from the University of Illinois at Urbana-Champaign. He is the author of The FT Guide to Understanding Finance and The Essential Financial Toolkit: Everything You Always Wanted To Know About Finance But Were Afraid To Ask. He is a Partner and Financial Advisor at Sports Global Consulting Investments, a company that specializes on providing wealth management services to professional athletes, and is a member of the CFA Institute's Speaker Retainer Program.
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Estrada, J. Are stocks riskier than bonds? Not if you assess risk like Warren Buffett. J Asset Manag 14, 73–78 (2013). https://doi.org/10.1057/jam.2013.5
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DOI: https://doi.org/10.1057/jam.2013.5