|
Published: September 3, 2009
Conventional wisdom is that stocks outperform
bonds.
That's wrong.
Fact: Investors who buck conventional wisdom and buy bonds are
more likely to see better results than investors who focus
solely on equities.
Don't let anyone tell you that bonds are staid, stodgy or that
they'll underperform the S&P 500. If you've heard any of these
three excuses about why you should invest in stocks instead of
bonds, you're getting lousy advice -- advice that is reducing
your returns and taking dollars out of your pocket.
Excuse No. 1: The only reason bonds look good these days is
because stocks took such a major hit in 2008.
Reality: Bonds have trounced stocks for the past five years.
The Lehman Aggregate U.S. Bond Index, which measures
investment-grade bonds, returned +22.8% during the past five
years. The S&P 500 lost -11.0% in that period, according to
Ibbotson & Associates, an authority on asset allocation. (S&P
returns exclude dividends.)
Investors who bought $25,000
worth of investment-grade bonds at
the beginning of 2003 ended 2008
with $30,700, a gain of $5,700. S&P
investors lost -$2,750.
Excuse No. 2: Stocks' good years
more than make up for the bad over
the long run.
Reality: The picture for stocks
doesn't get better over time -- it
gets worse. Much worse.
Bonds returned +70.4% during the
past 10 years. Stocks bled -28.7%.
Here's what those percentages mean
in dollar terms: A $17,600 gain for
bond investors and a loss of $7,175
for stock jocks.
And during the past 15 years -- just
in case you're still skeptical --
bonds continued to outperform
gaining +152.2% versus the stock
market’s +147.1% return.
Excuse No. 3: Bonds are difficult
to understand and expensive to buy.
Reality: That might have been true
once, but times have changed.
Exchange-traded funds, or ETFs,
provide investors with easy access
to the bond market at a low entry
point and with automatic
diversification. These funds also
provide management. Investors can
choose a fund based on its objective
-- T-bills, say, or high-yield
corporates -- and leave the
specifics to the pros.
The conventional wisdom that stocks
beat bonds is dead wrong. It's the
financial equivalent of the tortoise
and the hare. We all know how that
turned out. Smart investors -- that
is, rich ones -- know better.
-- Kyle Hartman
Staff Writer
StreetAuthority |
