Investors are sometimes advised to hold stocks for stocks outperform bonds in the long run. But so they should for they are riskier and risk is expected to earn higher returns. That’s an issue because risk can bite.
Sometimes the long run takes a long time coming. On February 21, 2024, the Nikkei 225 index for the Japanese stock market passed its high in 1969 for the first time, over 34 years later. See other examples in chapter 1.
One has to be careful of the Nikkei index. It’s an average of per-share stock prices, an arbitrary number depending on shares outstanding. Better use the Topix index. That was still 8% below its 1989 high (WSJ Feb 22, 2024). Including dividends, the index reached the 1989 high in March 2021. And don’t forget inflation: The Nikkei was still down in February 2024 adjusted for inflation.
A paper reports that compound return outcomes for the 29,078 U.S. publicly listed common stocks from December 1925 to December 2023. The majority (51.6%) of these stocks had negative cumulative returns. However, the investment performance of some stocks was remarkable. Seventeen stocks delivered cumulative returns greater than five million percent (or $50,000 per dollar initially invested), with the highest cumulative return of 265 million percent (or $2.65 million per dollar initially invested) accruing to long-term investors in Altria Group. Annualized compound returns to these top performers relatively were modest, averaging 13.47% across the top seventeen stocks, thereby affirming the importance of “time in the market.” The highest annualized compound return for any stock with at least 20 years of return data was 33.38%, earned by Nvidia shareholders.
See H. Bessembinder, 2024. Which U.S. Stocks Generated the Highest Long-term Return? At
https://ssrn.com/abstract=48970698.
There are hazards in measuring long-term returns. See
Chambers, D., E. Dimson, A. Ilmamen, and P. Rintamäki. 2024. Long-run Asset Returns. Annual Review of Financial Economics 16 (November). At https://ssrn.com/abstract=5022480.
This paper also reports the annual returns to stocks versus bonds in the U.S. and U.K., going back as far as 1800.