Most any broker worth his or her salt will tell you that stocks will outperform bonds over long periods. That notion has become so entrenched that it has become one of the bedrocks of modern investing theory.
There's this notion – or shall I say myth – that stocks will pay a 5 percent premium over bonds if you just hold on long enough. Brokers and investment advisers will also try to soothe the worried minds of investors by telling them stocks return 9 percent to 10 percent a year on average.
Well, yes, sort of, depending on what time period you want to carve out and depending on whether you enjoy sticking one foot in boiling water and the other in cold water and saying that, on average, you're feeling nice and warm.
If the great bear market of 2008 does nothing else, perhaps it will finally force investors to consider alternatives to the stock market for at least part of their portfolios.
Many investors lost half their retirement savings because a handful of Wall Street bankers were either too stupid or too greedy to understand they shouldn't bet the ranch on subprime mortgages.
After that debacle, savvy investors should at least reconsider the notion that stocks are a superior investment to bonds. I know, I know. Bond funds are boring, and you just want to treat them like that dull cousin who has to play outside while the adults are talking.
But bonds can and do outperform stocks over long periods. The annualized return of the stock market over the 10-year period ending March 31 was a negative 3 percent, according to Morningstar Inc. During that same period, long-term government bonds returned 8.2 percent.
Consider this: The loss to stock investors was not just the 3 percent a year, but also the lost opportunity cost of the fine 8.2 percent gain they could have had with bonds.
Now all you stock groupies calm down and quit chewing on the furniture. I know that was a little unfair since we've just gone through one of the worst bear markets ever.
But there have been other 10-year, 20-year and even 40-year periods when bonds outpaced stocks. So how do you like them apples?
Robert Arnott of Research Affiliates did a little ciphering and discovered that bonds outperformed stocks from 1929 to 1949; from 1968 to 2009; and going way, way back from 1803 to 1871.
"Bond skeptics generally point out that stocks have beaten bonds by 5 percentage points a year for many decades," Arnott said. "They should be shocked to learn that the 40-year excess return of stocks relative to 20-year Treasury bonds is zero."
In other words that 5 percent so-called risk premium of stocks over bonds is a myth. That's not to say that there haven't been long periods when stocks outperformed bonds. There have been.
But it may be time, perhaps, to let our little dull cousin come back in the house and talk to the adults.
