Audrey Deschenes
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Bull market in stocks will resume when we’re older and wiser

Younger people have to learn that equities aren’t always the best investments

This bull market’s long-term health desperately depends on investors first becoming older and wiser about what’s realistic.

Unfortunately, we’re not there yet, despite the stock market’s recent turmoil. It’s a particularly bad long-term omen that there have been so many cries of anguish over the recent report that Treasury bills have beaten both stocks and bonds so far this year.

This isn’t to deny that it’s been a long time since this was the case — more than 20 years, in fact. But the last two-plus decades are the exception rather than the historical rule. Over the past two centuries, according to data I obtained from the Wharton School’s Jeremy Siegel, T-bills have outperformed both stocks and government bonds in an average of more than one of every five calendar years.

Bull markets’ long-term health is dependent on investors knowing this historical fact and appreciating what it teaches us about risk. One way of viewing bear markets’ function is to educate successive younger generations to this risk and to re-educate older generations who have forgotten it.

It is interesting to note in this regard that the 2008-2009 bear market only partially succeeded in educating people. That’s because bonds soared during that equity debacle, seducing investors into the false sense of security that they will be OK as long as they diversify their portfolio between stocks and bonds.

As you can see from the chart above, this assumption is not infrequently wrong.

But won’t stocks and bond investors come out ahead of Treasury bills if they hold on long enough? Yes, provided the future is like the past and — an even bigger if — you hold on the for the very long term. Even when we expand our focus to 10-year holding periods, as you can see from the chart, T-bills still have beaten both equities and fixed income more than one of every 10 times.

We can only hope that 2015 doesn’t represent the beginning of another similar 10-year period. The last such period in U.S. history was the decade from 1973 through 1982, so in terms of historical norms we’re overdue.

One of the more hilarious descriptions of the role historical memory plays in the market cycle appears in the investment classic “The Money Game,” pseudonymously written by Adam Smith. He described how the market oscillates between two different sentiment environments depending on whether historical memory helps or gets in the way.