Stocks vs. Bonds

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 . . .



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

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