Investment Performance: Stocks vs. Bonds
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
email this article
- add to tip'd - stumble it - digg it - bookmark it
About the author: Nickel 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!
Related articles...
» Investment Performance: CDs vs. Stocks» Investment Advice: Ignore the Noise
» Investment Insights: Past Performance
» Stocks and Bonds vs. Mutual Funds
» The Downside of Target Date Mutual Funds
» Investigating Mutual Fund Correlations
» The High Cost of Low Risk Investing
» Market Turmoil, Portfolio Drift, and Asset Allocation: Time to Rebalance?
Was this article useful? Please sign up to receive our content via e-mail:
Great deals...
Readers’ choice...
Recent articles...
- Did Congress Make the Homebuyer Tax Credit Retroactive?
- Congress Extends $8000 Homebuyer Tax Credit, Adds New $6500 Credit
- Lending Club Update - October 2009 Performance
- How Much to Budget for Car Maintenance?
- Series I Savings Bonds Now Paying 3.36%
- Use Weight Loss Strategies to Get Out of Debt
- Weekly Roundup - Disney Shanghai Edition
- How to Save Money on Vacations
- Most and Least Reliable Cars - 2009 Edition
- Get 100 Free Trades from OptionsHouse Brokerage
Recent comments...
- Penny: I am about to purchase a new home.. which will be my new residence...
- APRIL DAYS: I FOR ONE HOPE THAT THE FIRST TIME HOMEOWNERS TAX CREDIT IS EXTENDED BECAUSE...
- JB: I drive a 1999 car and save $60 a month for car repairs, oil...
- Greta: My significant other and I bought a house in February 2009. My boyfriend...
- Jay: Don't forget nCleaner 2nd for turning off widows firewall and windows defender...also use the...
- Bryan: @Doug - you said it... if you simply delayed the closing, it would have...
- Sympathetic Dish TSR: @ Bonnie: Is your HD tv a Flatscreen LCD style? If so then a...
- John DeFlumeri Jr: Thanks for explaining the tax credit. Too bad for those who purchase in...
Most talked about...
- Dave Ramsey is Bad at Math
- $8,000 Homebuyer Tax Credit
- Dish Network Customer Service SUCKS
- How to Claim the First-Time Homebuyer Tax Credit
- $15,000 Homebuyer Tax Credit
- Reduced Credit Limits? Share Your Experience
- Would the "Fair Tax" Gut the Economy?
- Tax Stimulus Rebate Payments to Start Early
- Pay Off Mortgage Early? Or Invest?
- The Best Online Savings Accounts (Updated!)
- Life's Too Short to Drink Cheap Beer
- $7500 First Time Homebuyer Tax Credit
Did this study include the dividend yield of the S&P 500 in the calculation?
Comment by Brad — Jul 14th 2009 @ 6:12 pmStocks 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.
Rob
Comment by Rob Bennett — Jul 15th 2009 @ 12:33 pmI 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..
Comment by Dividend Growth Investor — Jul 15th 2009 @ 2:02 pmInvestment Portfolio Protection Strategy
A participant in the morning Working Capital Model (WCM) investment workshop observed: I’ve noticed that my account balances are returning to their (June 2007) levels. People are talking down the economy and the dollar. Is there any preemptive action I need to take?
An afternoon workshop attendee spoke of a similar predicament, but cautioned that (with new high market value levels approaching) a repeat of the June 2007 through early March 2009 correction must be avoided— a portfolio protection plan is essential!
What are they missing?
These investors are taking pretty much for granted the fact that their investment portfolios had more than merely survived the most severe correction in financial market history. They had recouped all of their market value, and maintained their cash flow to boot.
Their preemptive portfolio protection plan was already in place — and it worked amazingly well, as it certainly should for anyone who follows the general principles and disciplined strategies of the WCM.
But instead of patting themselves on the back for their proper preparation and positioning, here they were, lamenting the possibility of the next dip in securities’ prices. Corrections, big and small, are a simple fact of investment life whose origination point, unfortunately, can only be identified using rear view mirrors.
Investors constantly focus on the event instead of the opportunity that the event represents. Being retrospective instead of hindsightful helps us learn from our experiences. The length, depth, and scope of the financial crisis correction were unknowns in mid-2007. The parameters of the current advance are just as much of a mystery— today.
The WCM forces us to prepare for cyclical oscillations by requiring: (a) that we take reasonable profits quickly whenever they are available, (b) that we maintain our “cost-based” asset allocation formula using long-term (like retirement, Bunky) goals, and that we slowly move into new opportunities only after downturns that the “conventional wisdom” identifies as correction level— i. e., twenty percent.
So, a better question, concern, or observation during a rally (Yes, Virginia, seven consecutive months to the upside is a rally.), given the extraordinary performance scenario that these investors acknowledge, would be: What can I do to take advantage of the market cycle even more effectively— the next time?
The answer is as practically simple as it is emotionally difficult. You need to add to portfolios during precipitous or long term market downturns to take advantage of lower prices— just as you would do in every other aspect of your life. You need first to establish new positions, and then to add to old ones that continue to live up to WCM quality standards.
For the rest of the article, just Google the title.
Steve Selengut
Comment by Steve Selengut — Oct 26th 2009 @ 3:16 pm