Interesting discussion in Barron’s this week that questions a basic premise of the “cult of equities” — that Stocks usually outperform Bonds, and by healthy margins, too.

As it turns out, not always, and not as much as you might think.

Via Rob Arnott:

“It’s especially dangerous for investors, from individuals to endowment to pension funds, who were counting on equities to outrun fixed-income holdings and deliver supersized returns.

From 1802 to 2008, Arnott says, stocks outpaced bonds by 2.5 percentage points annually. But that superior showing can be deceiving because there were long stretches in which stocks underperformed, most recently in the 41-year period that ended on Feb. 28. True, the Standard & Poor’s 500 lagged behind the 20-year Treasury bond by a mere two basis points (two hundredths of a percentage point) a year in this lengthy span, but that’s enough to render it a substandard performer.

Bonds also beat stocks from 1803 to 1871, and from 1929 to 1949. But there were other multi-decade spans, such as the period from 1932 to 2000, when “stocks beat bonds reasonably relentlessly,” Arnott says.

On balance, he writes, stocks have had “long periods of disappointment, interrupted by some wonderful gains.”

Interesting stuff . . .

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Source:
Stocks vs. Bonds
Lawrence C. Strauss
Barron’s March 27, 2009

http://online.barrons.com/article/SB123819638720161459.html?page=sp

Category: Fixed Income/Interest Rates, Investing, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

28 Responses to “Stocks vs. Bonds”

  1. Blash says:

    You had an article on testosterone and trading performance before and I thought this might be of interest.
    It would definitely explain a lot.
    http://blog.wired.com/wiredscience/2009/03/financebrain.html#more

  2. Mike in Nola says:

    My best investments ever were some zero coupon treasuries we bought back in the mid-1980′s for our IRA’s. Even with the outrageous commissions, they have yielded a steady 7-8%. Too bad all but one has matured.

    Of course, in the interests of being far and balanced (or maybe retaining advertisers), they had to give one-trick-pony Jeremy Siegel the last word. The guy sounds like a real estate agent: it’s always a good time to buy, esp. now that they are cheaper after the crash showed what an idiot he is.

  3. Moss says:

    The bias for equities is easy to understand since so much $$$ is at stake.
    When was anyones compensation ever tied to a bond rating? The ‘ownership’ society rhetoric only acted to build on the notion. Equity is ownership, bonds are a claim. When did u ever hear Cramer or the other so called investment experts ever tout bonds.

    If one had gone into zero’s in the fall of 2007 and got out in Dec. 2008.. well you did very very well.

  4. JohnDoe says:

    Does the 1968-2009 stock performance include dividends in this chart?

  5. some_guy_in_a_cube says:

    Oops. The article forgot to mention this asset class: cash.

    Nothing has outperformed cash over the last 18 months. Not even close. In fact, as the crisis deepens, as deflation takes root and as the depression continues to gradually unfold, cash will continue to far outperform bonds, stocks, gold, housing, commodities, and even the willful self-delusion of the political and economic establishment.

  6. Mike in Nola says:

    What really gripes me is that 401k’s and 403b’s don’t let you buy bonds, cd’s or any other individual security. The limit is supposed to be because the employee is “not sophisticated enough” to chose for himself. What is really going on is forcing people into mutual funds so the plan managers can get their kickback from the funds.

    My wife’s right now in a 403. There was an option to have everything flow into a PCRA by Schwab. Over a year ago I decided to do that to get her into C’D’s back when rates were still decent. It was a pain to get it open, but it didn’t help. Still couldn’t buy anything but funds. Couldn’t even buy an ETF, which sort of gives away the game: the management fees on ETF’s are so low that there is nothing to kick back.

  7. Mike,

    don’t forget where Wool Pants come from..

  8. Broken says:

    The chart tells me that it is very bullish for stocks when bonds have outperformed for the last multiple decades.

    Also, does the chart take into account that tax rates favor equities? I know 401Ks don’t pay taxes, but they can’t buy bond issues either. Late 1970s IRAs had much looser investment restrictions. The Wall Street lobby took care of that!

  9. Outlier says:

    It amazes me that buy and hold investors don’t realize that all companies have life cycles, they start at zero and they end at zero. Granted with acquisitions some companies parlay for quite a while and there are a few multi-century old corporations out there, but hoping for that sort of half-life is a straight gamble. Buy and hold equals betting that you die before your stocks do…

  10. jimcos42 says:

    I find it absolutely amazing and astonishing how seemingly smart people get on bandwagons the better an asset class performs. Where were the “bonds are preferable right now” people in 1999? Where was the “buy-and-hold-is-dead” crowd at the same time?

    It’s hard to imagine any individual even having a 70 year investment horizon, i.e. a 20-year old looking to live to age 90. By the time most people even start looking at retirement, they are in their 30′s. College educations? Maybe a 20 year window.

    Pensions and endowments designed to persist into perpetuity with various distribution schedules are an entirely different story, and don’t count in this discussion.

    We’re actually in a great laboratory for careful, dispassionate contrarianism, and analysis that suggests probabilities for the messiness of “real world” life cycles.

  11. drey says:

    @some_guy_in_a_cube

    “Nothing has outperformed cash over the last 18 months. Not even close. In fact, as the crisis deepens, as deflation takes root and as the depression continues to gradually unfold, cash will continue to far outperform bonds, stocks, gold, housing, commodities, and even the willful self-delusion of the political and economic establishment.”

    Maybe, but 1% mm yields are tough to live with. I’ll make you a friendly wager, your cash versus a simple investment in GLD going forward over the next year, year and a half.

    What your observation overlooks is the potential for gold to perform or hold its own in deflationary as well as inflationary environments.

    2,000 an oz. by end of 2010 without breaking a sweat.

  12. cttfinder says:

    The graph and the data as presented in the article are WRONG.

    Anyone with some common sense should know that the statement:

    “Bonds also beat stocks from 1803 to 1871″

    is far off. The data in Siegel’s book and elsewhere totally contradict this.

  13. Aaron says:

    Does the graph above make any adjustments for inflation? I’d like to see a re-drawn graph which shows the real rate of return for both asset classes after inflation, with dividends included for stocks, to truly see whether bonds beat stocks over that period of time.

  14. dpity says:

    So what does this mean for discounted cash flow valuation models that use an equity risk premium ~6 % pts above the risk free rate?

  15. ben22 says:

    @ some guy

    With this:

    Nothing has outperformed cash over the last 18 months. Not even close. In fact, as the crisis deepens, as deflation takes root and as the depression continues to gradually unfold, cash will continue to far outperform bonds, stocks, gold, housing, commodities, and even the willful self-delusion of the political and economic establishment.

    I just have to ask; What are you talking about? Nothing outperformed cash?

    Simply stated, this is false.

  16. ben22 says:

    The lesson from this isn’t that bonds beat stocks, or that stocks beat bonds. The lesson is to just be careful when anyone tells you they are certain one way or the other.

    Just as one should use caution when Siegel says you should always buy stocks for the long term, you should be careful when you hear Bill Gross tell you that stocks are dead.

  17. DL says:

    Mike in Nola @ 11:40

    The other thing that would be nice as an option (apart from a short fund like SH or DOG) would be an inflation hedge, like DJP.

    We may need that in a few years (if not sooner).

    [Of course, it would be a very cold day in hell before government employees would be allowed to have an inflation hedge in their 401K].

  18. DL,

    you go w/: “Of course, it would be a very cold day in hell before government employees would be allowed to have an inflation hedge in their 401K”

    should tell you All you need to know about the set-up..

  19. some_guy_in_a_cube says:

    @ben22 said: I just have to ask; What are you talking about? Nothing outperformed cash? Simply stated, this is false.

    Ben22, please provide the asset class, including the percentage return, over the last 18 months that has outperformed cash.

    Regards.

  20. some_guy_in_a_cube says:

    drey said: What your observation overlooks is the potential for gold to perform or hold its own in deflationary as well as inflationary environments.

    I think gold bugs are going to be disappointed with its performance during deflation, and I believe a deflation is well underway. In fact, it’s just getting started.

    drey also said: I’ll make you a friendly wager, your cash versus a simple investment in GLD going forward over the next year, year and a half. 2,000 an oz. by end of 2010 without breaking a sweat.

    Good luck with that bet drey!

  21. drey says:

    Agree that deflation is well under way, some_guy, and guess what? Gold has more than held its own of late which is exactly the point.

    OK, we’ve got a ‘gentleman’s bet’ – GLD vs. cash for the next year.

    Cheers!

  22. karen says:

    i’m in on that bet, except for the deflation part. either way, $gold is where you want your $.

  23. ben22 says:

    @ some guy:

    You said 18 months correct? So I’ll go back to the end of September 2007. Not sure exactly what cash means to you, or what rate of return you are using for cash but I’ll use the GLD as my measure of gold, it traded at around 66.50 then, it is at 90 now. I’ll let you do the math on that one to figure out the %, it’s higher than any cash products I know about, certainly higher than any risk free cash, the GLD closed at 90.69 Friday.

    Long treasuries beat cash over that period as well. For example, you could have put money in the TLT at the end of Sept 07 @ around 88, it closed at 104.56 on Friday. What cash did better than that exactly? the TLT was at 120 early 09.

    I’d be willing to bet over the next 18 months both stocks and bonds do better than cash. I’m no Buffett groupie but cash is trash right now.

  24. ben22 says:

    @ some guy,

    since we are talking asset class, privately held REITS also would have beat cash in terms of % return over the last 18 months.

  25. some_guy_in_a_cube says:

    ben22:

    Good job, you came up with 3: GLD, TLT and privately-held REITs. Not exactly the types of asset classes that Mom and Pop are told to stuff into their 401Ks, but good choices anyway, and they indeed outperformed cash. Of course, these returns came with the kinds of risk and volatility not found in holding cash, you be the judge if those returns were worth it.

    ben22 also said: I’d be willing to bet over the next 18 months both stocks and bonds do better than cash. I’m no Buffett groupie but cash is trash right now.

    That “trash” today buys 40% more stocks than it did in October 2007. If this trend persists, the “trash” will be able to buy even more of those stocks and bonds in 18 months.

  26. some_guy_in_a_cube says:

    I said: …That “trash” today buys 40% more stocks than it did in October 2007.

    Math error. The price was marked down 40%, so the same dollar now buys (approximately) 80% more.

  27. ben22 says:

    some guy,

    fair enough, but when did this turn into a 401k conversation? I was simply saying that the statement you made above that all asset classes did worse than cash over the last 18 months was not true. Very few qualified plans have “cash” as an option anyway, lets not fool ourselves into thinking stable value funds are cash. If you think they are, how safe were you feeling when Lehman went down last year? Ever see how much MBS is jammed into one of those?

    I don’t exactly agree that there was a lot of risk holding the TLT the last 18 months, more volatility, of course, but not much different risk, the main risk to an investment like that is inflation so cash was basically the same risk, unless you thought the US was going to default in the last 18 months.

    Mom and pop, for the most part, would be better off only contributing up to the employer match in the 401k, if they are lucky enough to get one, and all other savings should go to a Roth IRA, where they can indeed buy things like the GLD and TLT as an owner, not a participant.

  28. some_guy_in_a_cube Says:

    re: innumeracy

    1/.6=~ 1 2/3, or 2/3 more, after 40% ‘markdown’..

    .667 is not ‘approximately’ .800, actually, there’s a 20% Gulf ‘tween them..