I just ran across an interesting article from back in March over at Barron’s. In it, they state that:
One of the bedrocks of modern investing has been the surety that stocks outperform bonds over long periods. Stocks’ risk premium, or excess return over bonds, has become gospel for financial advisers, brokers and pension consultants, among others.
They then go on to point out the results of a recent research paper that showed stock performance can trail that of bonds for significant periods of time. According to Richard Arnott, author of the study:
“We’ve had 30 to 40 years of building this cult of equities, where if your time horizon is long enough, it doesn’t matter what you pay for stocks. That’s dangerous.”
Arnott’s research revealed that, from 1802 to 2008, stocks outpaced bonds by 2.5% per year. However, bonds beat stocks for lengthy periods during that time.
Most recently, in the 41-year span from 1968-2009, bonds edged out stocks by a small margin (as measured by the S&P 500). Bonds also trumped stocks from 1803 to 1871 and from 1929 to 1949. From 1932 to 2000, however, stocks beat bonds handily.
As with most data sets of this sort, the results are highly dependent on how you slice things up. Overall, however, Arnott argues that stocks “have long periods of disappointment, interrupted by some wonderful gains.”
I think that the take home message here is that you shouldn’t have blind faith in the power of the stock market. Likewise, you shouldn’t be afraid to throw some alternate investments types into the mix. Not only do they help with diversification, they very well might outperform over significant time periods.