Top of Mind


Is it REALLY True that 96% of Stocks Don’t Beat Treasuries in the Long Term?

I recently Tweeted my amazement at a ThinkAdvisor article that cited an Arizona State professor’s study indicating that only 4% of stocks in the history of the U.S. stock market (from 1926-2015) had lifetime returns that outperformed one-month Treasury bills over their lifetimes.

Could this really be true?  If so, active mutual fund managers have a much harder (perhaps impossible?) job than I ever imagined!  And, if it is nearly impossible to pick winning stocks, then index investing would certainly be the preferred strategy.

But alas, when you read past the headline, the facts are more mundane, although still significant.  The 96% figure actually refers to the collective return of stocks not beating Treasury bills (T-bills) in their lifetimes.  Therefore, some of these 96% of stocks actually beat T-bill performance and some did not. However, when all of their returns are put together, they do not exceed T-bill returns.  In fact, 42.6% of common stocks’ lifetime returns exceed those of T-bills; still an unimpressive figure, but far more than 4%!

Why the discrepancy?  Looking at the total universe of stocks that has ever existed, individual stocks do not tend to exist for very long (the median lifetime of a stock is only 7½ years, according to the study).  Why is this?  Well, if the underlying company is not successful, it tends to close up shop.  If it is successful, it tends to be acquired or merged into another company.  So, although we know that in the entire history of the stock market, stocks crush T-bill returns, most stocks stick around for only a short portion of that history.

In addition, stock market wealth creation is extremely top-heavy.  An impressive statistic from the study is that one-third of one percent (that is, .33%) of all stocks are responsible for half of all of the historic creation of the stock market in excess of T-bill returns, while only 4% are collectively responsible for all of the wealth creation (which was the source of the 96% figure stated above).

That means that there are a few stocks that are big winners in the market over their lifetimes, but a ton of losers.  In fact, do you want to know what the most frequent observed lifetime outcome of a stock’s return is, according to the study? If you guessed negative 100% (yes, that would be a complete loss of principal), you would be correct!

But what can all of this tell us about retirement plan investing?

  • The Importance of Diversification Cannot be Overstated — As stated above, only 42.6% of stocks had lifetime returns exceeding that of T-Bills.  What are the average investor’s odds of picking the correct 42.6% of stocks over time?  Well let’s just say, if I gave you 42.6% odds of wining in a casino, you would most likely not take it, if you know anything about math.  So unless you are Warren Buffet, stock picking is probably best left to the professionals in favor of a retirement plan strategy that invests in many securities, such as mutual funds.
  • Active Mutual Fund Managers Have a Difficult Job — While not as difficult as I assumed after reading the original article headline, picking long-term stock winners, when so few securities are responsible for the excess returns of the stock market, is clearly not the easiest of jobs.  This is likely the reason why index funds have gained appeal over the years.

And there is one important lesson, in general, that we can learn from this exercise: Don’t believe every headline you read on the Internet! 

Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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