Stocks vs Bonds: The Full Guide to Growth, Risk & Fees

The short version

Stocks win by $45,181.15 over 20 years at the defaults — $10,000 becomes $69,764.08 in stocks at 10.2% a year, against $24,582.93 in bonds at 4.6%, or 6.98 times your money against 2.46 times. A 60/40 blend reaches $46,265.53. After 3% inflation, the endings are worth $38,626.68 in stocks and $13,610.97 in bonds in today’s money. A 1.00% yearly fee cuts the stocks’ ending to $58,137.02, while a 0.03% index fee leaves $69,385.22. And there is one flip: in 2008, stocks fell 37% while bonds rose 5.24%, so $10,000 in stocks became $6,300.00 while bonds became $10,524.00.

The math in plain words

Both sides grow by the same rule: the amount times one plus the yearly return, raised to the number of years. Stocks at 10.2% a year for 20 years are $10,000 times 1.102 to the power of 20, which is $10,000 times 6.9764, which is $69,764.08. Bonds at 4.6% are $10,000 times 1.046 to the power of 20, which is $10,000 times 2.4583, which is $24,582.93. The gap is the two endings subtracted — $69,764.08 minus $24,582.93 is $45,181.15 — and the gain is the ending minus the starting $10,000: stocks gain $59,764.08, bonds gain $14,582.93.

The default case, line by line

$10,000 invested, 20 years, stocks at 10.2% a year, bonds at 4.6% a year, inflation at 3%. The stocks’ growth factor is 1.102 to the power of 20, which is 6.9764, so the stocks’ ending is $10,000 times 6.9764, which is $69,764.08 — 6.98 times your money. The bonds’ growth factor is 1.046 to the power of 20, which is 2.4583, so the bonds’ ending is $10,000 times 2.4583, which is $24,582.93 — 2.46 times your money. The gap is $45,181.15 in stocks’ favour.

Why stocks win over long horizons

The lead compounds, so it grows fastest in the later years. Over 10 years, $10,000 becomes $26,412.89 in stocks against $15,678.95 in bonds — stocks ahead by $10,733.94, less than a quarter of the 20-year gap of $45,181.15. Over 30 years, stocks reach $184,267.11 against $38,543.45 in bonds — stocks ahead by $145,723.66, more than three times the 20-year gap. Ten more years nearly triples the stocks’ ending, from $69,764.08 to $184,267.11, and adds only $13,960.52 to the bonds’, from $24,582.93 to $38,543.45. A 5.6-point return advantage sounds modest; over 30 years it turns $10,000 into 18.43 times your money against 3.85 times.

The year bonds win: 2008

Bonds win in the years stocks fall, and 2008 is the cleanest example: the S&P 500 fell 37.0% and the Bloomberg Aggregate bond index rose 5.24%. On $10,000 that is stocks $10,000 times 0.63, which is $6,300.00 — a $3,700.00 loss in one year — against bonds $10,000 times 1.0524, which is $10,524.00, a $524.00 gain. Bonds won the year by $4,224.00. The flip is real but narrow: it takes one terrible year for stocks, and bonds only win while stocks are falling. Over the full 20 years, stocks win by $45,181.15 even after absorbing 2008-style years into their 10.2% average — the average already includes the crashes.

The 60/40 middle path

Sixty percent stocks and 40% bonds blend to 7.96% a year — 0.6 times 10.2 plus 0.4 times 4.6 is 6.12 plus 1.84, which is 7.96%. $10,000 times 1.0796 to the power of 20 is $46,265.53 — 4.63 times your money, between the $69,764.08 of all stocks and the $24,582.93 of all bonds. The blend gives up $23,498.55 of the stocks’ ending to buy a calmer ride: in a 2008-style year, the blend falls by roughly 20% instead of 37%, because the bonds’ 5.24% gain cushions the stocks’ 37% fall. That cushion is the whole point of the blend.

Inflation: what the money is really worth

Divide each ending by 1.03 to the power of 20, which is 1.8061, and the nominal figures become real ones. Real stocks are $69,764.08 divided by 1.8061, which is $38,626.68 — 3.86 times your money in today’s buying power. Real bonds are $24,582.93 divided by 1.8061, which is $13,610.97 — 1.36 times. Stocks still win by $25,015.71 in real terms, but inflation takes nearly half the nominal ending off both. The bonds’ real return is the more sobering figure: 4.6% a year against 3% inflation is only about 1.6% a year of real growth, which is why the bonds’ real ending is barely above the starting $10,000 after twenty years.

Fee drag: the quiet thief

A 1.00% yearly fee cuts the stocks’ return to 9.2% a year, so $10,000 times 1.092 to the power of 20 is $58,137.02 — 5.81 times your money. A 0.03% index fee leaves 10.17% a year, so $10,000 times 1.1017 to the power of 20 is $69,385.22 — 6.94 times. The dear fee costs $11,248.20 against the cheap one, and $11,627.06 against no fee at all, while the cheap fee costs only $378.86 against no fee. A 1% fee sounds small — one penny on the dollar, once a year — but it compounds against you exactly the way the return compounds for you, and over 20 years it takes nearly a sixth of the ending.

Three common mistakes

Mistake one: judging by one year. The 2008 flip is real — stocks $6,300.00 against bonds $10,524.00 — but one year is not a verdict. The 10.2% average already includes the crashes, and the 20-year gap of $45,181.15 is the average outcome, not a promise. Judge a 20-year decision on 20 years, not on the worst twelve months you can remember. Mistake two: forgetting inflation. The nominal endings look generous — $69,764.08 and $24,582.93 — but in today’s money they are $38,626.68 and $13,610.97, and the bonds’ real ending is barely above the starting $10,000. Mistake three: paying 1% for the same stocks. A 1.00% fee leaves $58,137.02 against $69,385.22 at 0.03% — a $11,248.20 penalty for the dear fund, for the same stocks, over the same twenty years. Check the fee before you check the return.

The bottom line

At 20 years and the defaults, $10,000 becomes $69,764.08 in stocks and $24,582.93 in bonds — stocks ahead by $45,181.15. The 60/40 blend reaches $46,265.53, the inflation-adjusted endings are $38,626.68 and $13,610.97, and the fee gap between a 1.00% fund and a 0.03% fund is $11,248.20. In a 2008-style year, bonds win outright — $10,524.00 against $6,300.00 — which is why the horizon decides the answer: money you need soon belongs in bonds or the blend, and money you need in decades belongs in stocks.