Common Sense on Mutual Funds by John C. Bogle & Swensen David F

Author:John C. Bogle & Swensen, David F.
Language: eng
Format: epub
Publisher: John Wiley & Sons, Ltd.
Published: 2010-05-10T16:00:00+00:00

Common Stocks Return to Earth, Too

There is a third important area of mean reversion: the long-term returns of common stocks. Unlike stock mutual funds and stock market sectors, RTM relates here to absolute, not relative, returns. For more than two centuries, over rolling 25-year periods, the U.S. stock market has demonstrated a profound tendency to provide real (after-inflation) returns that surround a norm of about 6.7 percent. As shown in Figure 10.7, the swings around this norm are reasonably narrow, and returns are much below 4 percent in only five periods.

TEN YEARS LATER

RTM in Stock Market Sectors

The RTM patterns illustrated in the previous edition—growth stocks versus value stocks, large-cap stocks versus small-cap stocks, and U.S. stocks versus international stocks—also continued during the past decade-plus. (Standard & Poor’s Corporation no longer provides indexes for high-grade stocks and low-priced stocks.)

Growth funds, which had slightly lagged value funds during 1979 to 1995, soared past value funds during the great bull market that ended in 2000 (Figure 10.3). Then value quickly shot ahead during the next two years. The advantage changed hands often since then, but significantly, the average annual returns of the two categories during the 72-year period covered by Figure 10.3 were actually identical—9.7 percent for growth funds and 9.7 percent for value funds.

Large-cap stocks and small-cap stocks, too, continued their back-and-forth pattern (Figure 10.5). Large did better during 1994 to 1998; then small shot ahead during 1999 to 2006, with large doing better since then. While the small-cap advantage over large-caps is substantial in terms of historical annual return (13 percent versus 10.7 percent), it is significant that large-cap stocks at least held their own over incredibly long periods; for example, from 1945 through 1973 (28 years), and from 1982 through 2008 (26 years). Maybe the long-term historical pattern will persist—who really knows?—but investors who hold small-cap stocks disproportionately larger than their market weight would be well-advised to have a full measure of patience.

The past decade has also reflected—in spades!—RTM between U.S. and international stocks. The domination by U.S. stocks continued through 2001, only to see a major reversal (in part due to (Continued) the weakness of the U.S. dollar) through 2007. Then, in 2008, U.S. stocks held a slight advantage, followed by a slight disadvantage through mid-2009. Over the full half-century, the annual returns are virtually identical: U.S. 9.1 percent, international 9.0 percent. Investors who believe that they can time these reversions—so evident in Figure 10.6—are playing a dangerous game.

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