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Investment Performance: Stocks vs. Bonds

Written by Nickel - 4 Comments

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.

Source: Barron’s

Published on July 14th, 2009 - 4 Comments
Filed under: Saving & Investing

About the author: is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

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4 Responses to “Investment Performance: Stocks vs. Bonds”

  1. 1
    Brad Says:

    Did this study include the dividend yield of the S&P 500 in the calculation?

  2. 2
    Rob Bennett Says:

    Stocks always do well starting from low or moderate valuation levels.

    Stocks always do poorly starting from sky-high price levels.

    I have come to believe that stocks are the same as anything else you can buy. They are a great deal at some prices and a horrible deal at other prices.


  3. 3
    Dividend Growth Investor Says:

    I would prefer to own equity in a profitable business and not own anything related to an unprofitable one ;-)

    Stocks have gathered a lot of negative publicity recently with the financial crisis, the “lost decade” and articles from Barrons about equities doing just as fine as fixed income.

    I believe that equities were overvalued in 1990’s, which is why we are digesting the excesses right now. Now equities are valued just right if you ask me ( except for Motors Liquidation of course ). I bought stocks when S&P 500 was at 1500, I also bought when it was at 700. If S&P 500 drops to 500 I would keep buying.. I am not going to run out of funds soon, as my purchases are funded by my dividend payments.. As long as the world economy keeps working, I would still get at least some dividends sent my way..

  4. 4
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