Conclusions & Surprises of Time Horizons

We looked at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds for a time horizon of 1 through10 years. The data was analyzed during the time period of 1926 - 1999 to include the Great Depression and 1940-1999 to include a more normal environment.

Conclusions & Surprises

1. For time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns.
2. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return.
3. The trend continued for a 9 year and longer time horizon. The gap in minimum return between stocks and bonds continued to grow with time.
4. The Great Depression had a much greater impact on the performance of bonds than stocks. It is interesting that short term bonds had the best minimum return during 1926 - 1999 and worst minimum return during 1940 - 1999.
5. A surprise: During 1926 - 1999, short term bonds, known as the safest investment, had the worst minimum return for a 10 year period while small cap stocks, known as the riskiest investment, had the best minimum return during this period.
6. Another surprise: The safest long term investment with the best minimum return that also had the best maximum return was stocks. Who would have thought that small cap or large cap stocks would be considered safe?
7. The impact of the Great Depression on the performance of stocks can be seen for a 1 through a 7 year time horizon. Stocks turned from a negative minimum return to a positive minimum return at the 8 year time horizon during both time periods. The data was the same at the 8 year horizon for small cap stocks and at the 10 year horizon for large cap stocks.
8. A third surprise: The minimum return of short term bonds and long term bonds appear similar at the 10 year time horizon. Long term bonds with its longer time horizon and greater risk should have a wider spread. Greater risk should be rewarded with higher returns.

Bottom Line: If you can handle the ups and downs, keeping your focus on the long term of 8 or more years, stocks outperform bonds. Buy stocks rather than bonds. If you desire more stability in your account balance and are willing to reduce the potential return bonds need to be added to the portfolio. Understanding risk, performance of investments by time horizon, the time available before accessing the account, and the view of the investment environment are very important for an investor