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Bernstein Shows the Opportunity Cost of Not Investing in Equities

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Tremendous opportunity cost

Richard Bernstein believes that the opportunity cost of not investing in equities is substantial. He said, “Few investors seem to appreciate the magnitude of the opportunity cost of avoiding equities. Individuals, pensions, endowments, foundations, and hedge funds have all suffered sub-par returns because of their fear of the equity market.”

To demonstrate his point, he provided two charts that show the costs of being afraid of equities over the past five years:

The first chart shows the relative performance of several asset classes’ annualized returns compared to the S&P 500 (VOO). The second chart shows the relative performance of several asset classes’ annualized returns compared to global equities (ACWI).

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Analysis of results

Looking at the first chart and analyzing the results, the asset class that had the lowest opportunity cost—meaning that, if you were invested in it, you’d have lost the least compared to being invested in the S&P 500—was US high yield bonds. 

However, even after being the closest performing class to US equities, high yield bonds had a spread of 650 basis points per year for the last five years. On this, Bernstein said, “Paying 650 basis points per year for perceived safety seems exorbitant.”

Being invested in the three-month Treasury Bill and gold over US equities carried the highest opportunity costs of 1,350 basis points and 1,930 basis points, respectively, over the five-year period.

Since the US stock market has outperformed global equities, the opportunity cost of investing in the asset classes shown in the second graph wasn’t as high. The opportunity costs of investing in US high yield (HYG) (JNK) and high-grade corporate bonds (LQD) over global equities were 160 and 250 basis points, respectively. Meanwhile, investing in the three-month Treasury Bill and gold carried the highest opportunity costs.

Bernstein closed his argument regarding the opportunity cost of not investing in US equities by asking whether you’re losing out too. Let’s look at his argument in the next article.

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