Stocks versus Bonds

Robert Arnott has written an interesting article comparing stocks versus bonds as an investment:  “Bonds: Why Bother?”

A few excerpts:  “Starting any time we choose from 1979 through 2008, the investor in 20-year Treasuries (consistently rolling to the nearest 20-year bond and reinvesting income) beats the S&P 500 investor. In fact, from the end of February 1969 through February 2009, despite the grim bond collapse of the 1970s, our 20-year bond investors win by a nose.”

Arnott goes back to 1801 and notes that stocks do tend to return 2.5 percent per year more than bonds. Unfortunately this is of little comfort to a stock investor who buys in at a peak. The U.S. stock market has spent 173 out of 207 years below a previous peak. “The peak of 1802 was not convincingly exceeded until 1877, a startling 75 years later. … the drop from 1929–32 was so severe that share prices, expressed in real terms, briefly dipped below 1802 levels.” How about more recent history? “In real, inflation-adjusted terms, the 1965 peak for the S&P 500 was not exceeded until 1993, a span of 28 years.”

Arnott notes that an indexed investor suffers badly from a bubble in a particular stock or bond. If a stock goes up to a fantastic price level, e.g., Cisco in the dotcom boom, the index fund is forced to buy a lot of it.

“For the long-term investor, stock markets are supposed to give us steady gains, interrupted by periodic bear markets and occasional jolts like 1987 or 2008. The opposite—long periods of disappointment, interrupted by some wonderful gains—appears to be more accurate.”


  1. artem

    May 1, 2009 @ 4:37 pm


    Long-term, the only return one can can expect from stock is dividend. Anything else is just redistribution of money among investors, and the only question here is why someone is surprised when it cancels itself out in long-term.

  2. Rob Schoening

    May 1, 2009 @ 7:04 pm


    Have a look at the S&P 500 and the Nikkei on the same 20-year chart:$NIKK&p=M&yr=20&mn=6&dy=0&id=p00992586365

    Buy and hold for the S&P 500 is a questionable strategy. For the Nikkei investor it is an unmitigated disaster.

  3. Calif*

    May 1, 2009 @ 8:41 pm


    The analysts start recommending something right before it collapses. I’m dollar cost averaging into stocks & avoiding bonds now that everyone hates stocks & loves bonds. Eventually someone is going to notice the price of gas is now 30% higher than it was 3 months ago, corporate earnings have grown by $300 billion but everything is $300 billion more expensive, & the only reason they’re winning by a nose is because of some Bernanke Madoff character crossing out $300 billion & writing in $0 on his statements.

  4. Sean O.

    May 2, 2009 @ 9:56 am


    Stocks, bonds, commodities, and real estate are all asset classes. We tend to believe those that tell us diversification withing a particular asset class is a winning strategy. The CAPM proves it. However I’ll take Buffett’s decidedly non-CAPM strategy over the purists every time. Of course if you become Buffett’s size you can never get out of a stock because, in order to have an impact on the portfolio, you have to buy massive amounts of each holding. And liquidation of such holdings becomes nearly impossible.

  5. Matt Henderson

    May 2, 2009 @ 4:28 pm


    Harry Browne recommended a “package” in which one should invest the wealth that one considers precious. Its objectives are to avoid large losses, while making a reasonable gain during good times. The package, known as the “Permanent Portfolio”, is comprised of four investments, each of which should respond dramatically to the four possible states of the economy (as identified by Browne):

    1. Prosperity -> Stocks (a broad index)
    2. Inflation -> Gold
    3. Deflation -> 30yr Treasury Bonds
    4. Recession -> Cash (only asset class not doing poorly)

    Browne recommended dividing your wealth 25% in each, and periodically rebalancing. He argued this portfolio will do fine come what may—good times, bad times, political/currency instability, etc. (He recommended holding your gold in bullion, outside your country of residence.)

    Since 1972, this portfolio grew 9-10% annually, while suffering a worst year loss of 4-6% in 1981. In 2008, of the “popular” portfolios our there (coffeehouse, bernstein, etc.), this portfolio happened to finished first (losing only 2%; primarily saved by the long bonds).

    If you’re interested, I’d recommend reading his “Fail Safe Investing” book.

    Browne’s forward looking approach to portfolio construction made a lot of sense to me.

  6. Andreas Yankopolus

    May 3, 2009 @ 10:02 am



    Why gold as a hedge against inflation instead of Treasury Inflation-Protected Securities (TIPS)? A commodity like gold doesn’t seem like the best choice for this.


  7. Matt Henderson

    May 5, 2009 @ 2:35 am



    A good discussion of the PP can be found in this article, including, in the comments, a discussion of TIPS vs Gold. Particularly, have a look at craigr’s comment:

    — Matt

  8. Martin

    May 6, 2009 @ 11:27 pm


    The numbers about “years spent below a previous peak” are typical for a random walk with a large variation compared to the annual trend…

  9. D Torrance

    May 8, 2009 @ 12:55 am


    “Arnott notes that an indexed investor suffers badly from a bubble in a particular stock or bond. If a stock goes up to a fantastic price level, e.g., Cisco in the dotcom boom, the index fund is forced to buy a lot of it.”

    A couple years ago there was a hullabaloo about a certain type of [index] mutual fund that tried to correct for this phenomena…does anybody remember more details about it? I wonder how those funds fared in the past year.

  10. Les Jones

    May 9, 2009 @ 6:11 pm


    I have gold ETFs (GLD, GTU, CEF) and TIPS both in my 401K. A couple of arguments I’ve heard against TIPS as an inflation hedge:

    – TIPS are based on official inflation numbers – the consumer price index rather than actual inflation.
    – The CPI tends to artificially suppress the inflation number
    – CPI explicitly excludes energy and home prices.
    – In the event of runaway inflation the government could simply suspend or limit the inflation adjustment in TIPS.

  11. Andreas Yankopolus

    May 11, 2009 @ 1:26 pm


    Matt & Les,

    Thanks for the info on TIPS. Matt’s link has made a good point of departure.


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