No. of Recommendations: 2
There’s a promo piece on TMF’s home paged whose title is all you need to read of it, “What Skipping Stocks Cost You”. Imagine, instead, a counterpoint article entitled, “What Skipping Bonds Cost You”. Should either be convincing to you? Well, that depends on the numbers each trots out, right? and not just the raw performance numbers, but the risk-adjusted adjusted performance numbers.

Yes, as everyone “knows”, except for truly anomalous [sic], truly short-term [sic] time-frames (like the last the last 20 years or so, LOL), stocks have offered investors a higher upside, albeit at the cost of a possibly lower downside. In other words, the range of returns for stocks is wider than that for bonds. So, if you can get the market-timing correct, you can make a bigger bundle buying stocks than bonds, never mind the minor fact that the greater volatility of stock prices exacerbates the timing problem.

Profiting from either stocks or bonds depends on two numbers:
(1)The difference between entry price and exit price, discounted by commissions, taxes, and inflation.
(2) The sum of dividends or coupons received, discounted by taxes and inflation.

Together, the two give you what can be spent at the grocery store, which is as objective a measure of 'investment return' as any. That’s your “bird in the hand”. If, instead, you want two birds, then you have two choices: use bonds to pull a pretty predictable 6%-8% out of markets, or use stocks to pull a less certain 8% to 10%. In other words, there’s a relationship between risk and reward that the stock touts under-play and that the bond touts over-play. In either asset-class, the would-be investor can lose a ton of money, just as they can also make a ton of money. It all depends on getting the timing right.

Is now, really, a good time to be buying stocks? Is now, really, a good time to be buying bonds? Maybe, "Yes". Maybe, "No". Who knows? But this much can be known. No matter the difficulty of devising a useful means to measure what is meant by "risk-adjusted return", so that comparability between asset-classes can be obtained (and 'Sharpe Ratio' merely one of dozens of attempts), the trade-offs between reward and uncertainty are readily understood by investors, and that's why they are fleeing stocks and flooding into bonds. Far more than the promise of higher returns from equities, they are valuing the putative certainty that bonds can offer. Unfortunately, no matter which asset-class they choose, they are likely to be drowned by the macro-economic tsunami headed toward the US economy caused by deficit-spending. That's the lion in the bush, waiting to pounce, that everyone wants to ignore.

Charlie
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