What If the Stock Market Were a Bond?

Here’s an update to one of my crazier/demented/possibly brilliant ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

Crazy? Let me explain.

I took the historical market performance of the Wilshire 5000 (including dividends) and invented a hypothetical long-term bond that matched the index’s gains step-for-step.

I assumed that it’s a bond of infinite maturity and pays a fixed coupon.

There’s one hitch, though. I had to choose a starting yield-to-maturity for the beginning of the data series in December 1970. So this isn’t a completely kosher experiment because the starting point is based on my guess.

If I chose a number that was too high, the historical performance wouldn’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM was too low, the yield would gradually get pushed down to microscopic levels.

Fortunately, the data made my job easy. After four decades, the window I had to work with is pretty narrow. Starting with 9.2% was too high, and 8.8% was too low. After playing with the numbers, I finally settled on 8.95%.

Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past four decades. Through yesterday, the yield stood at 7.74%.

Posted by on March 14th, 2012 at 9:15 am


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