Death of stocks? Reports are greatly exaggerated
Bonds will occasionally outperform the stock market in the short run, but over the long haul, stocks still tend to come out on top. So don’t lose faith in your equities, says Money Magazine’s Walter Updegrave.
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Question: The conventional wisdom is that stocks should outperform bonds over the long haul. But over the past 10 years, Vanguard’s Total Bond Market Index fund has had a slightly higher return than Vanguard’s Total Stock Market Index fund with a lot less volatility. Have fundamentals in the market changed such that stocks no longer offer a premium return? –David Poston
Answer: You hear the mantra repeated so often - stocks beat bonds over the long term - that it’s become an absolute truth for many investors.
But while it may be comforting to believe there is at least one completely reliable standard you can always count on in an investing world rife with uncertainty, the fact is that virtually all truisms have exceptions and qualifications
One big qualifier to the “stocks trump bonds” rule is the length of time you expect your money to remain invested. Or, to put it in terms former president Bill Clinton might use, it depends on what the meaning of “long term” is.
If your idea of long-term investing is ten years, history shows that while stocks usually excel over that period of time, it’s not unprecedented for bonds to sometimes come out on top. Indeed, if you go to the bible of investment performance data - Ibbotson Associates’ “Stocks, Bonds, Bills and Inflation Yearbook” - and compare returns for the 73 rolling 10-year periods starting with 1926-1935 and continuing through 1998-2007, you’ll find that bonds outgained stocks in 11, or 15%, of those periods.
The usual reason that bonds manage to buck the trend every now and then is that stocks occasionally become overvalued. That’s exactly what happened back in the late ’90s. Giddy investors pushed stock prices to bloated levels, the market crashed and money invested in stocks at or near peak prices ended up earning subpar long-term returns. Thus, it was the irrational exuberance of the go-go ’90s that resulted in bonds beating stocks over the past 10 years.
But given enough time, stocks have historically shown that they’ve been able to bounce back, even from extremely bloated prices and eventually overtake bonds. So, for example, if you extend your notion of long term to 20 years, there’s only one of 63 rolling 20-year periods since 1926 in which bonds beat stocks: 1929-1948, the 20 years after the Crash of ‘29 that ushered in the Great Depression. And if you extend that time frame by just one year to 1949, stocks come out ahead.
I don’t want to suggest that stocks’ superiority is guaranteed (although as I pointed out in an earlier column, there are rational reasons to expect stocks will outperform). But I do think that history makes a compelling case that even if you buy stocks at the worst times, you’ve still got a chance of earning higher returns than in bonds if you hold on long enough. Of course, that doesn’t provide much comfort if you need the money and your stock investments are still faring poorly before “long enough” arrives.
As to whether fundamentals have changed so that stocks are no longer likely to deliver higher returns in the future, I don’t see anything that suggests that’s the case. Yes, we’re definitely in a challenging period right now. We’ve lurched from a stock-market bubble to a real estate bubble and now we’re mired in a credit crunch.
But these sorts of convulsions and crises, while unsettling, are a normal part of the ebb and flow of economies and markets. We’ve been through such episodes before and we’ll go through them again. If anything, I’d argue that all this fear and anxiety makes it less likely that stocks are poised for long-term inferior returns. I’m more wary of stocks when investors can’t shovel money into them fast enough because they’re convinced stocks are a sure thing. That’s when stock prices are most apt to become gaseous and their future return prospects dimmest.
It would be wonderful if we knew ahead of time when stocks are going to generate killer returns and when they’re going to be dogs. But until someone finds a way of developing this sort of clairvoyance, revving up a tool like our Asset Allocator and then investing in a mix of stocks and bonds that reflects how long your money will be invested and your tolerance for risk is the best way I know to deal with the uncertainty inherent in investing.
Trade rather than invest. The more thought, time, and energy you put into anything in life the better the chances it will turn out well. That is the bottom line.
How many investors can’t even read a chart properly? Probably most of them. I guess some people don’t like to put time into growing their money, that is fine and dandy. But if anyone thinks they can get great results with no effort they’re thinking like an idiot. Investing is the only arena of achievement I can think of where so many people think that the results should be effortless.
I have enjoyed reading the comments on this article. I chuckle when I read comments like “paradigm shift” or “because of X Y Z this time it is different”. My favorite was that we are running out of energy. Solar and nuclear energy are for all practical purpsoes limitless. 10 years ago people were saying the same type of things, only they were more along the lines of insinuating that the stock market will never stop going up and the economy is unstoppable. The fact of the matter is the U.S. had greater debt after WWII relative to GDP. If individuals have more debt now than historically then it is their problem. History will repeat itself. Stock markets will be overvalued and undervalued. No one know exactly when the inflection points will occur, but they will. The comments that I read here only signal met to BUY BUY BUY. It’s time to increase the amount one is saving into the stock market. The way to be a great long term investor is to be a contrarian. The more gloomy it looks, the better it must be priced. Will it keep going down? I don’t know. Probably for a while, but it WILL eventually go back up, just like it has done for 200 years. Until then it is time to grab the bargains. If one has 10 - 20 years before he needs the money like I do then the stock market is a great place to be. HP for a P/E of 15, GE at a P/E of 14 and JPM at a P/E of 10 are GREAT deals. Stop whining and invest your money.
Based on my Elliott Wave analysis and my trusted W.D Gann wheels, the Nasdaq is very vulnerable to a “3rd wave” crash.
Implement a globally diversified portfolio using structured market funds (or index funds if thats what you have). Make sure to diversify between large, small, value and growth asset classes. Once this is done, simply rebalance periodically and you should do great. Rebalancing will discipline you to always buy low and sell high. After all, money is always going somewhere…
Trying to guess what the market is going to do next will inevitably lead to frustration, anxiety, and mistakes…
By the time we finish paying for Social Security, Medicare, energy, the real estate crisis and Iraq, we’ll have hyperinflation like the world has never seen before. You’ll need a wheelbarrow just to carry your credit cards to the grocery store.
Stocks may not do as well as in the past, because executives take all earnings in compensation, and remaining earnings are distributed as stock options to executives and employees.
Some of the comments here are really incredible. In Canada, during the 90’s, we were one of the largest debtor nations in the developed world when measuring debt as a percentage of GDP. Nobody wanted to invest here. Even with our dollar at $0.70 US, Canadian investors were throwing money into the US economy because “that was the only way to make money”. Now, 10 years later, the Canadian market has significantly outperformed the US and what do all my clients tell me when the dollar is now at par? “We can’t invest in the US. Investing in Canada is the only way to make money”. Until last year all my clients told me they like banks because “people always make money in banks.” History has proven exactly what the article says and it’s amazing to me to hear so many people that think the historic trend will now change and they’ve figured out when and why.
The stock market doesn’t move because of earnings reports and projected sales growth or government debtloads. It moves because of investor sentiment driven by fear and greed. When the market is under pressuer, as an investor we have the choice to either be afraid, or take advantage of others fear and profit. I know my choice.
I have been running for nealry 15-20 years to date!, stock returns have been poor over this period of time. I believe this is because of earnings being siphoned off by executives; earning used for employee stock options, billions of cash is used to buy companies that are worth far less. Unless this changes returns will be low or negative. Fourty years ago, executives did not earn hundreds of millions in compenasation, earning came in as dividends or stock value appreciated. There is a collusion between companies and elected officials, campaign contributions must end, in order for our country to progress.
The Golden Rule of Investing for Retirement is “set it and forget it!”.
Stop trying to learn about investing and how to beat the bull/bear markets. Unless you can predict the future, you do not know what is going to happen. Just keep saving money in moderate investments and let the markets do their thing. If you are too scared to take risks, hide money under your mattress and relax.
Retirement saving is a piece of cake, folks. The more fear you have, the greater the amount of money you have to lose. The less fear you have, the greater the amount of money you have to gain. It’s a self-fulfilling prophecy.
david marks - I agree with you 100%, but yet where is the alternative? I see the load of debt as absolutely terrifying, but where else do I put my money? I think the economy is going to implode as people finally start paying the piper for living FAR beyond their means for the last 20 years.
This commentator is no “expert”. We are at a point in history where we can expect a paradigm break, including with the idea that stocks will always be good investments, “long term”.
Never in the history of modern investing have we faced such enormous corporate, personal and governmental debt loads. Meanwhile, at the same point in time we face huge military, VA, Social Security/Medicare, and other enormous spending increases!
The idea that stocks are a good investment, or that they will return 10% a year over time, is an outmoded idea, particularly with the above-mentioned debt problems, along with our “derivative” currency’s value falling more all the time.
Then there is the new all-time high in petroleum prices, peak petroleum production (net output, per capita, petroleum production peaked YEARS ago), global warming, etc.
Good luck planning your long term retirement and other investments arount “equities” from now on.
I think it’s hilarious to read this and other articles that are essentially asking other people to buy stocks so that the stock market keeps in new fresh faces.
They know their individual stocks won’t keep the market afloat so they ask you to look at stocks— before anything else.
Ironically, all the arguments people are making for why stocks are in for a bad future are *exactly* why stocks outperform bonds on average - and will continue to do so.
One of the most fundamental principles of markets is that riskier assets produce greater average returns - if they didn’t, nobody would buy them and the price would drop until the returns *were* greater. Stocks are (and are almost certain to remain) riskier than bonds, therefore their average return will remain higher.
There’s another reason bad news indicates you should stay in (or buy more) stocks - all of that bad news has already been priced into the market, that’s why it’s down lately. Selling based on that can only work if everybody else is wrong about how bad the situation is - and if your judgement about that is better than the collective judgement of the professional full-time money managers who dominate the markets, then you should quit your job and become the next Warren Buffet.
Reacting to this kind of news is one of the best ways ever invented to buy high and sell low.
Don’t get caught up in the “Sky is falling mentality” perpetuated by the liberal media. To get the markets returns sometimes you have to suffer the markets losses. Stay put in low cost index funds, both domestic and international. (Ex. FSIIX,FSTMX,FSMKX)all have exspense ratios of .10. Hedge with emerging markets (Ex. brazil index ewz currently up apx. 3% YTD.) Buy when others are selling, maintain disipline, when the bulls run, which will always happen you will make $$$
Luke — while you might be right that the US will not experience such success, SOMEONE will. It seems unlikely in the extreme that there will be a prolonged worldwide slowdown, particularly with so many developing and undeveloped nations to fuel growth. If the good stocks are not on the NYSE, then they will be on the Nikkei, or the Euronext, or the Jakarta exchange. There will always be a growing market SOMEWHERE.
Read zealllc.com essays and find out what the market really does. It goes up and down n cycles. From the 60’s thru 1980 it was flat. From 82 to 1999 it went up. The stock market goes in long wave reversions. It goes in 34 year cycles (17 years up and 17 years down). The stock market starting in 2000 started a cycle of 17 years where the market will do nothing but grind sideways until the average PE’s get to an undervalued level of 6 or 7 before the next Bull Market starts. The market has been this way and always will. Sure there will be Bear Market rallies between now and 2017 or 2018 but the maarket will always drop back until stocks are undervalued. The time now is for commodities for at least the next decade. If you want to plan the stock market you need to pay attention to the RSI and MACD of the various indexes or individual stocks in order to make money. If you just put your money in and do nothing for the next decade your return taking into account inflation will be nothing before the next Bull market begins. Wall Street and CNBC would never tell you this because CNBC is paid by Wall Street. Do yourself a favor and read various essays on zealllc.com and learn what is really happening now and for the next decade. In the year 2017 or 2018 you will see that the average PE of stocks has ground down to 6 or 7 and the dividend yield will have finally increased from 1 - 2% today on average to 5% - 6%. That is how the markets have always worked and always will. They go from a point where people have gotten to a point of given up on stocks and then the next Bull starts until there is a mania stage like we had in 2000 where everyone including the shoeshine boy is giving stock tips and where the PE’s are 100+. It is a Wall Street game and always will be. Turn off your TV, get with a reputable financial planner, read up on Warren Buffett, buy Jim Rogers book on “Hot Commodities”, invest in commodities like the Merrill Lynch trakrs commodiies fund that tracks the Jim Rogers “Rogers International Commoditiy Index” fund and thank me in 2018 or according to Jim Rogers it may even go beyond 2018 as China and the rest of the Far East develop. The only empires in history were empires because of the commodities that they controlled. This country and the dollar are toast. It will always be a gret country but the best days are behind us. When Nixon dropped the gold standard to back the US dollar in the early 1970’s it was the beginning of the end of the US dollar. Since then we’ve had an irresponsible FED especially under Alan Greenspan and it continues today under Bernacke to keep printing fiat dollars that are no more than a useless piece of paper that is backed by nothing other than the promise to pay. With the record deficits we have, the FED continuing to run the $ printing presses 24/7, record trade deficits, baby boomers starting to retire, Social Security IOU’s that the government owes, this countries financial future is very, very dismal. All empires come to an end and the end of the US as a world empire and the dominance of the US dollar are done. The next power of the world is China and that is why Jim Rogers has moved himself and his family to China. The next century + belongs to China whether you like it or not. So if you plan on making any money in the US stock market for at least the next decade you better watch the RSI and MACD on stocks and the indices and buy and sell accordingly or you will have no return. A person only has 40 years in which to make a nest egg and if you lost money since 2000 and the next 10 + years will give you no real return then you will have lost one half your investing life. Once lost there is no way to make it up. The best book you can ever read is “What Wall Street Doesn’t Want You to Know”. There are quotes in there by Warren Buffett, Ben Stein, and many others that say for the average person to build a nest egg is to start early, invest in a low cost mutual fund like the Vangard 500 fund and by the time you are ready to retire you will be a millionaire without ever reading or studying the market. The stock market only gives an average 7% return over time and that is why it is important to start early, don’t touch it and let the compounding of interest over 30 - 40 years make you a millionaire. Sure there will be some stocks that out perform the average of the top 500 stocks but you will be lucky to be able to pick the winners on a consistent basis. If Warren Buffett says that is the way for the average person to become rich then it is good enough for me. The croonies that CNBC parades across the stage every day are useless.
There are several ways to make money. One adage is to buy low and sell high. There are lots of high quality stocks that are good deals right now. And if you add in the dividend, then you make money even when the stock is down. I’m taking those dividends and buying more stocks with good dividends. It just keeps compounding regardless if the stock is up or down. When the stock is down, I can buy more. The more things change, the more they stay the same. I remember the 90’s with the new economy. Everybody said that this time it was different. But it wasn’t . Same thing with the recession in the early 90’s. Everyone said it was different, but it wasn’t. Some recessions are more severe than others. But the economy goes in cycles. It always has, and it always will.
I think it is very wise to pull out of stocks for the short-term to see where the market is headed. There are too many contradictory voices at this point.
What ever happened to the SEC required text that says “Past results are not necessarily indicative of future results”. If we believe that’s true, what’s the point of this article.
If we do believe past results matter, then the question is what caused the past results. I find it highly unlikely that the US will experience the same success over the past 70 years over the next 70, compared to the rest of the world. The transition to a debtor nation should not be underestimated.
If so, what are the implications of that?
To suggest that bonds are going to somehow outperform stocks in a 20-30 year period is absurd. It’s possible–if by possible, you mean possible like the sun not coming up tomorrow, or you winning the lottery tonight.
You don’t get money in the long run by loaning money via bonds. You do it by being an owner in stocks. Put aside the emotions and the general hysteria from the “financial journalists” and you’ll be fine. As long as there are things such as “Dollar Cost Averaging” and little something known as “compound interest”, stocks are where it’s clearly at.
A second factor might be that bond values have been boosted by interest rates dropping to historically low values over the last 10 years. Unlikely bonds will again get that kind of boost anytime soon.
To offer a contradicting view, it seems to me there is a high probability that this time around, the fundamental situation is different. The economy and the stock market in particular is predicated on sustained growth, but we’re beginning to bump against the limits of production of energy, food and several raw materials in a finite world. Long-term, there is no such thing as “sustainable growth” for the entire world economy unless resource use (in particular energy) can grow. A possible (perhaps even likely) option is that within the next 5-10 years, the world economy basically stops growing and might actually retract significantly. In this environment, stocks seem significantly more at risk than bonds, especially something like inflation-protected i-Bonds.
We are in a very different economic environment then even 10 years ago let alone going back to 1926. It will be interesting to see what the future holds not the past. With record deficits, serious trade imbalances and a crashing dollar don’t bet U.S. stocks are going to do very well.
“The race is not always to the swiftest, nor the battle to the strongest. But that’s the way to bet.”
‘Going with your own instincts’ is why most people lose money. Our instincts are great for survival in the wilderness, lousy for investing. You need solid demonstrable reasons that are correlated (you can google correlation coefficients if you don’t know what this means)to the markets and the economy if you want to deviate from your base allocation. Most of your money should be in stocks, but if you are really worried, for solid reasons (not because you read about it in the WSJ,)there may be little harm in adjusting your allocation temporarily… but never act or react because it ‘feels right’; you may be right once or twice, but you’ll eventually get clobbered - read about the guy who brought down Amaranth - some things are hard to recover from.)
This is a very interesting juncture in the finanacial markets, with equity (stock) markets saying things are a bit rough but ok, and credit markets (bonds) saying we are in big trouble. One of them will be right. The other will see a major correction in the next couple of years. It’s not so rare for this to happen, but it is rare that the disagreement is this extreme; it may be worthwhile to put your money in CD’s for a year or so and wait to see who is correct, especially if your investing horizon is shorter, but if the equity market is right and the credit market wrong, we’ll see a big run-up in equities you don’t want to miss. I rode out the 2000-02 crash entirely in equities, never sold out, rebalanced annually, and my long term avg annual rate of return is still 10.6% (that covers my entire investing history, 1994-2007), which isn’t bad by any measure. Even if I do a weighted avg rate (which will weight the losses of 2000-02 more heavily than the gains of the 1990’s because I had more money invested) I am still at 9.5%). I should disclose that I’ve done a little better than an S&P500 Index would have (especially over the past 5 years) because of my bias for international stock, but the point is the process, not the numbers.
Stocks have gone up over the years with the availability of cheap energy (oil, coal, natural gas) to fuel industry. Assuming that were to end (pretty safe assumption, I think), do we still expect stocks to grow over the next 20 to 30 years? I don’t, but I’m not an “expert.”
Stocks are not much higher than their peak in 2000. Eight years of growth gone now, with no end to the turmoil in sight.
“In the long run, we are all dead”, as the saying goes. But the reality is that is about the only thing certain about the future. There is no certain way of preserving what you have saved. The value of gold fluctuates wildly. Even the value of money stuffed under the mattress can be lost to inflation.
If the economy to continues to expand and businesses continue to produce more, you can expect the value of investments in those businesses to increase right along with their production. But there is no certainty that will happen to any specific business or group of businesses. There will be winners and losers. Which is why diversification is so important.
The second thing to remember is you probably have more than one investment objective. Some money is for retirement, some for your kids college, some to for a new car etc. Not only is the timeframe an issue, but the level of risk you can tolerate may be different as well.
You may well be willing to risk losing some of that money for a new car in order to get the higher returns that will buy something nicer. If things work out, you buy that new hybrid Toyota, if they don’t you settle for a traditional sedan.
In fact, you might make that same gamble with the education fund - win and the kids head off to the Ivy League, lose and they go to the state college or end up taking out large loans to pay for their education.
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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).
I was in Omaha, in May. Got opportunity to hear Mr. Buffet and Mr. Munger again this year in Berkshire Hathaway meeting.
There are several important tips to share, but the most relevant for our company is:
Warren mentioned that there are some significant challenges ahead: Dollar weakening, burgeoning trade deficit, crude pricing, etc. and will cause pain in the short term.
But in spite of all this, both Warren and Charlie think that we as a nation will be fine and prosperous in the years to come. Warren also made comments that he is confident that our children and grand children will live better life that us.