Investing in the 1940's

What can we learn from Investing in the 1940's

The table below shows the performance of small cap stocks, large cap stocks, long term bonds, and short term bonds during the 10 year period of 1940 - 1949, as found in the book titled Investments by Bodie, Kane, & Marcus. This period is best known for World War II, people at home rationing all resources, troops coming home, and people spending money once the war ended. Did anyone make money during this period? What investment did the best?

If $1,000 was invested on January 1, 1940 here is how the numbers came out:

Small Cap Stocks = $6,523
Large Cap Stocks = $2,392
Long Term Bonds = $1,423
Short Term Bonds = $1,038

Stocks outperformed bonds by a large margin. Small cap stocks really took off during the war and achieved the high for the decade in 1945. Large cap stocks came close to the high for the decade in 1945. Long term bonds was a distant third. Short term bonds came in last and really did not grow, adding $38. Doesn't it seem ironic that during a period of great uncertainty that stocks would outperform bonds and grow this much.

Below is a table of the value of the $1,000 investment at the end of each year.

Year /Small Stocks /Large Stocks /Long Bonds /Short Bonds
1940 /882 /904 /1,065 /1,000
1941 /767 /802 /1,076 /1,001
1942 /1,158 /969 /1,134 /1,003
1943 /2,313 /1,226 /1,189 /1,007
1944 /3,713 /1,483 /1,232 /1,006
1945 /6,766 /2,019 /1,316 /1,009
1946 /5,900 /1,832 /1,318 /1,013
1947 /5,717 /1,922 /1,302 /1,018
1948 /5,366 /2,023 /1,342 /1,026
1949 /6,523 /2,392 /1,423 /1,038

OBSERVATIONS:

1. Stocks do a better job of providing investment growth
2. Bonds to a better job of providing account balance stability
3. Short term bonds are not an investment
4. Stocks need to be held with a longer term perspective
5. Stocks did well even in a period of uncertainty
6. You can not time the market because if you would have waited to invest in stocks until the war was over you would not have made any money during the last half of the decade
7. Stocks had up and down years
8. Long term bonds lost money 1 year, so it is possible for a bond to lose money
9. Short term bonds never lost money in a year
10. Small cap stocks had more risk than large cap stocks as the low was lower and the high was higher

It is important to know what you want your investments to do and act accordingly. It is not possible to predict the future value of an investment and diversification can smooth out some risk.