Ibbotson Yearbook

I just got my copy of the 2006 Ibbotson Yearbook in the mail. Ibbotson is a money management firm in Chicago that’s best known for keeping long-term performance information on the stock market (the company was recently bought by Morningstar).
The yearbook tracks the monthly performance of stocks, bonds, treasuries and inflation since 1925. It’s a fascinating resource. The yearbooks are available at many libraries, but being a data junkie, I like to get my own copy. You can order a copy here.
The data confirms that the stock market is the best place to be. Over the last 80 years, large-cap stocks have gone up an average of 10.36% a year (dividends and capital gains). One dollar invested in 1925 would be worth over $2,600 today. On average, the market doubles every seven years. Nothing beats it.
When you look at the long-term chart, even ugly periods like 1987 appear as minor blips. It’s true that bear markets can be painful, but the long-term data is clear. The market goes up, up and up. The only hitch is that you have to be patient.
Stocks are also big winners against bonds. Long-term corporate bonds have averaged 5.92% a year. Long-term Treasuries have average 5.47% a year, and T-Bills have returned just 3.71% a year.
Ibbotson also looks at small-cap stocks, and that group has done even better than the large-caps. Since 1926, small-caps have averaged 12.64% a year. By small-cap, Ibbotson generally means stocks that are in the smallest 20% of the market’s universe, although they’ve recently altered their criteria.
Ibbotson also breaks out the performance of each size decile, or 10% slice of the market. What’s interesting is that the returns are almost perfectly rank-ordered—the smallest 10% has done the best, and the largest 10% has done the worst.
Since 1926, the smallest decile has returned an average of 13.96% a year. My only caution about micro-cap investing is that although the “outperformance premium” is very real, it’s not very well-behaved. The relative performance is highly cyclical. It’s either feast or famine.
Micro-caps badly trailed the market during the 1990’s, but over the last seven years, micro-caps have been stellar performers. Since 2000, the micro-cap decile is up 211%. This may be the most underreported market event of this decade.
It’s almost like there’s an invisible bull market going on. Interestingly, the peewees started to cream the big boys in 1999 before the market peaked.. Although the S&P 100 (^OEX) is still about 29% off its all-time high, the broader indexes have been hitting new all-time highs lately. Very soon, the Wilshire 5000 Total Return Index (^DWCT) will hit an all-time high.
Another interesting aspect of small-caps is that the outperformance doesn’t comport with the Capital Asset Pricing Model. In English, this means that the small-caps have done even better than their risk behavior suggests.
Something else I noticed from the Ibbotson data is that, in recent decades, long-term Treasuries have been surprisingly competitive against stocks. Mind you, the stock market is still the big winner. But since 1968, long-term Treasuries have averaged 8.69% a year, which is pretty good compared with the 10.52% for large-cap stocks.
Over the long-term, large-caps have averaged 4.63% a year better than long-term T-bonds. Given the current yield of the 10-year Treasury of 4.85%, this implies a market return of about 9.7% (i.e., 1.0463 * 1.0485).
The yearbook also includes a section with data going back to 1815. Personally, I tend to skeptical of those types of studies since the capital markets were so underdeveloped. During the 19th century, most stocks traded at par, meaning $100 a share. Investors were interested in dividends, not capital gains. The idea of continuously rising indexes is fairly new. Back then, stocks traded much like bonds, except that management decided what the dividend (often annual or semi-annual) would be.
Since there was little inflation (before the Fed) and generous dividend payouts, stock prices had little reason to advance much. By Ibbotson’s numbers, the after-inflation return of the market over the last 80 years is only 7.10%.
Sometimes I think we’d be better off the old way. Imagine a world without inflation and you owned a stock that almost always traded around $100, and every six months you got a check for $3.50 a share. Booyah!

Posted by on April 1st, 2006 at 2:42 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.