Estimating the relative performance of equities and bonds over the next 25 years

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This paper estimates the risk that equities will under-perform bonds over the next 25 years. Reasonable estimates are that, over the next 25 years: l) The probability that equity will under-perform bonds is 23.0%. 2) The cost of guaranteeing an equity fund against underperformance relative to bonds over a 25-year period is 38.3% of the fund. 3) The mean value of the guarantee in 25 years time is 8.8% of the bond fund, implying a discount rate of 5.7% below the bond return. We conclude that there is a material risk that equities might under-perform bonds over the next 25 years. This is consistent with the fact that some investors hold long bonds as part of their portfolio.