Tuesday, May 19, 2009

Bonds outperforming stocks over the last 40 years? WOW!

"You are never as good as you think in a winning streak nor as bad as you think in a losing streak."

The other night I was listening to a Mets-Giants game on the radio and the announcer reminded us of the above quote and attributed it to Bobby Valentine (former Mets' manager). I have no doubt that Bobby V did say it, but I am also willing to bet it has been said millions of times over the years by coaches in all sports and said to teams from Little League also-rans to world champions.

But somehow, the word did not get to those who now claim that Bonds outperform Stocks in the long run.

I won't argue with the math. I will argue with the timing. The measurement comes at a time following a bear market (losing streak) in equities and a bull market (winning streak) in bonds.

Now that said, 90% of all sports articles seem to be written like this and it makes them no less interesting, so long as you keep in mind Valentine's sage warning, I strongly urge you to read the article as it is very thought-provoking.

Stocks Losing the Long Run to Bonds - WSJ.com:

"Two brutal bear-markets for stocks within a decade and a stunning bull run for government bonds is challenging the gospel that stocks will always beat bonds if investors just hold on long enough.

Now, Rob Arnott, a veteran financial analyst and market pundit, has lobbed the academic version of a Molotov cocktail at one of the most sacred tenets of investing....

'For the long-term investor, stocks are supposed to add 5% a year over bonds. They don't,' Arnott, founder of investment consultants Research Affiliates and former editor of the Financial Analysts Journal, wrote in a paper published in the latest Journal of Indexes.

'Indeed,' Arnott contended, 'for 10 years, 20 years, even 40 years, ordinary long-term Treasury bonds have outpaced the broad stock market.'
and later:
"Through the end of April, the 10-year annualized return on the S&P 500 was negative 2.5%, according to Standard & Poor's.

Meanwhile, an index fund tracking long-term U.S. Treasury bonds, Vanguard Long-Term Treasury Fund, gained 7.2% annualized over the same period.

"People fret about our 'lost decade' for stocks, with good reason, but they underestimate the carnage," Arnott wrote.

Arnott's research shows that starting at any point from 1979 through the end of 2008, an investor in 20-year Treasurys who continually rolled over into the nearest bond and reinvested the income would have come out ahead of the S&P 500."

So while it is always good to question what we "know" and to think about it from the perspective of what if we are wrong, these findings likely are driven by timing. If I were making a long-term bet I still believe that stocks will outperform, but maybe will remember that such an expectation does not mean it will always be that way.

Indeed, sometimes the Pirates have a better record than the Mets, but I am still willing to bet that over a longer haul, the Mets (and equities) will come out ahead.


fboness said...

My life, being finite, is driven by timing. If stocks lose to bonds over my lifetime then stocks have been a losing investment.

Anonymous said...

The mets could use a winning streak right about now... and Bobby V at that.