Sunday, October 25, 2009

Stocks Vs Bonds

Contrary to conventional wisdom, which gives the impression that stocks being riskier yield greater returns in the short run, the graphic below appears to clearly show that it is only in the much longer run that stocks score over bonds.

As the Times reports, "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". The trend reverses only for investments of 30 years and more only.

However, ironically enough, the recent decade of weakness in the equity markets, also means (thanks to the law of averages) that the equity markets may be in for good times in the coming decade. As Prof Jeremy Siegel says, "Historically, whenever you’ve had long periods when bonds outperform stocks, that sets up an excellent time to invest in stocks. So looking forward, things look very favorable for stocks and not favorable for bonds, certainly not Treasury bonds."

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