In Last 10 Years Bonds Outperform Stocks By Far

The NY Times had an interesting article entitled In This 10-Year Race, Bonds Win by a Mile that analyzed the performance of bonds versus stocks over the last 10 years and over other extended periods of time. It's worth reading because of some of the comparisons it does of stock and bond returns.

"Calculations performed for Sunday Business by Morningstar, using data from its Ibbotson Associates subsidiary, show that the stock market underperformed important bond categories over the 10 years through September — with an annualized loss of 0.2 percent for the Standard & Poor’s 500-stock index, versus annualized gains of 8.1 percent for long-term government bonds and of 7.8 percent for long-term corporate bonds."

A few paragraphs down, the article continued:

"Writing in the May-June issue of the “Journal of Indexes,” Robert Arnott, chief executive of the investment firm Research Affiliates in Newport Beach, Calif., declared that bonds had been neglected by the financial press and by many investors. He reviewed market returns going back 207 years, and found that stocks outperformed bonds by only 2.5 percentage points, annualized. This “2.5 percentage point advantage over two centuries compounds mightily over time,” he said. But for very long stretches, bonds have done better than stocks."

I'm not sure what it means that the further back you go the less comparable the data. I also read on Bloomberg that if you go back 80 years, bond yields were actually better than stocks. That may have been when the Dow was at 6,700 though.

Either way though, the point of the article is valid. Stocks may provide better long-term return but it's not by much and you'll have to deal with much more volatility over this long-haul. That means there may be 10-20 year periods where stock returns are terrible. That's significant because if you are planning for retirement, you can't really afford the volatility. Noone wants to be 65 and see their portfolio shrink by 50% in a year.

So why have stocks gotten so much more press? Because there is a whole industry that has grown up around stock gambling. Brokerages, investment advisors, investment banks, investment newsletters, websites, etc. all make money dishing out advice on how to best gamble on the stock market. Bonds are much easier but much less lucrative for all of the advistory services. You find some high quality, decent yield bonds, purchase them, and then sit on them for the next 10 or 30 years and collect your payments. Boring, but effective.