Can you sleep at night? For some reason, many investing professionals and pundits have a creepy fascination with what happens in your bedroom. Cooked into their recommendations is often the elusive “sleep at night” factor (which, believe it or not, isn’t a primary benchmark determinant—see Bunk 4).
Many people just can’t stomach volatility—wild wiggles make ’em crazy! Give them ulcers and keep them up at night. For those folks, before we consider dooming them to what’s likely a lifetime of lackluster returns, I’d put a few hard questions to them.

Are You So Sure Stocks Are the Problem?

First, do you know bonds can and do have down years? (You do if you read Bunk 1!) Of course, everyone knows stocks had a dreadful 2008, but most folks (who haven’t read this book) don’t realize 10-year US Treasuries were hammered in 2009—down 9.5 percent.1
Second, are you so sure you hate wild wiggles? Folks think of downside volatility as bad and upside volatility as not volatility at all. But it’s all volatility. You like the wild wiggles when they’re up wiggles. It’s amazing how many folks claiming they hate stocks at the end of a bear market—don’t want to hold them ever again—change their tune radically after a couple or three or six years of a bull market and come back to stocks (sometimes just in time to get hammered again). Suddenly, they can’t get enough “risk”—want to load up on it. These folks aren’t risk-averse; they’re myopic—they’re heat chasers and crowd followers (and may need a court-appointed financial conservator to protect them from themselves). A certain amount of stock phobia can be offset by training yourself to ignore the near term and think long term. Of course, many folks can’t go there.
It’s not easy to do. It requires training. Folks naturally think about near-term survival (see Bunk 7). But if you can train yourself to think longer term, those sleep-at-night factors melt away. Why? Because if you’ve got a longer time horizon (and if you’re reading this book, you most likely do—see Bunk 3), stocks are just likelier to treat you better. And you can learn to sleep, even in difficult volatility (rather the same way as a child you learned to sleep on Christmas Eve, despite knowing all the excitement immediately ahead).

Investing Is a Probabilities Game

Past performance is never indicative of future results—simple fact. But history can tell you if something is reasonable to expect. Investing isn’t a certainties game. It is instead, like medicine and many fields of science, a probabilities game. And if you have a 30-year time horizon (as many investors do, even some who are in or near retirement), odds are in your favor with stocks. Since 1927, there have been 54 rolling 30-year periods. Stocks beat bonds in every one, by a huge 4.8-to-1 margin on average. (See Table 2.1.)
Even over 20-year periods, odds are heavily with stocks. Since 1927, stocks have outperformed bonds in 62 of 64 20-year rolling periods (97 percent), by a 3.7-to-1 margin on average. (See Table 2.2.)
Some people are just doggedly bearish. Instead of thinking about what’s overwhelmingly more likely based on probabilities, they think, “What if?” What about those times bonds beat stocks? What about a “black swan”? (It’s amazing after 2008-2009 how many folks have come to believe that once-in-a-century “black swan”-like disasters happen every few years—including, it seems, the author of the book by that name.) In those rare 20-year periods when bonds beat stocks, it was by only a 1.1-to-1 margin on average (see Table 2.2). Historically, when you bet against the odds and won, you didn’t win much—not much bang for your buck. And stocks were still net positive in every period they lagged bonds. Not up huge, but then again, neither was the alternative. Not a lot lost if you had 20 years ahead of you going in.
Table 2.1 Stocks Versus Bonds (30-Year Rolling Periods )—Stocks Historically Win Big
Source: Global Financial Data, Inc., S&P 500 Total Return Index for US stocks, USA 10-Year Government Bond Total Return Index for US bonds from 12/31/26 to 12/31/09.
Average Total Return Over 30-Year Rolling Periods
US Stocks2,509%
US Bonds524%
Even looking into those two periods when bonds beat stocks (Table 2.3), note that one ended in the recent 2007-2009 bear market—a historically super-large bear market. Yet even so, if you’d stuck to your guns and stuck with stocks, in the 20-year period ending 2009, stocks were still up 404 percent. So on average, $100,000 invested in stocks grew to $504,000 versus $533,000 in bonds—the difference of a little return wiggle that could have gone either way. Odds are low in a 20- or 30-year period that bonds outperform—and when they do it’s not by much. Odds have to be particularly low after having just come through such a period. But yes, sometimes the unlikely happens. The question is: Do you want to go with a low-probability occurrence for the reward of maybe outperforming 1.1 to 1?
Table 2.2 Stocks Versus Bonds (20-Year Rolling Periods)
Source: Global Financial Data, Inc., S&P 500 Total Return Index for US stocks, USA 10-Year Government Bond Total Return Index for US bonds from 12/31/26 to 12/31/09.
Average Total Return Over 20-Year Rolling Periods
US Stocks909%
US Bonds247%
Average Total Return Over 20-Year Rolling Periods When Bonds Outperformed Stocks
US Stocks239%
US Bonds262%
Table 2.3 When Bonds Beat Stocks—It’s Not by Much
Source: Global Financial Data, Inc., S&P 500 Total Return Index for US stocks, USA 10-Year Government Bond Total Return Index for US bonds.
20-Year Periods When Bonds Outperformed Stocks US Stocks US Bonds
January 1, 1929, to December 31, 194874%91%
January 1, 1989, to December 31, 2008404%433%
If you could go to Vegas and place a bet that 97 percent of the time paid out 3.7 to 1, or one that 3 percent of the time paid 1.1 to 1, you’d go with the 97 percent odds every time. You see that easily, but somehow that doesn’t translate for most when it comes to volatility and stocks. Far too many folks rob themselves of likely better long-term results because they get blinded by near-term volatility. Said another way, you may feel like the wild wiggles keep you up at night now, but 10, 20, and 30 years from now, you don’t want to lose sleep over having gotten inferior returns—because then you can’t get over that. That’s real pain.
Still, some folks just can’t think about 20- and 30-year time horizons. Too long! Fine. Start training yourself by thinking just a bit longer term. Because even given just a bit of time, stocks start to have better and more consistently positive returns than bonds. (Remember Bunk 1.)
There will always be some folks who simply can’t think longer term no matter what. The ulcers and the sleeplessness are just too much for them. That’s fine! Folks who can’t stomach volatility must lower their return expectations and make up for it through making more money other ways, or frugality, or something else that offsets lower future investment returns. No other way—you can’t get stock-like returns without stock-like volatility. And if someone sells you on stock-like returns with materially less than stock-like risk, you must read Bunks 5 and 11 because you may be talking to a con artist. And being 100 percent ripped off will definitely cause you to lose a lot of sleep.
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