Has anyone seen/heard any details about this Deutsche Bank AG study that apparently concludes that U.S. bonds have an almost 50% chance of outperforming U.S. equities long term? The WSJ article has far too little info on the methodology to fairly critique it, so I thought others might have seen the details. Goes against everything I've learned, so I'm looking for someone to "say it ain't so."http://interactive.wsj.com/fr/emailthis/retrieve.cgi?id=SB1005519712495435720.djm
http://interactive.wsj.com/fr/emailthis/retrieve.cgi?id=SB1005519712495435720.djm Actually the linked article is a very good one. It demonstates one of the peculiarities about listing and comparing mutual funds' rates of return, also. Namely, the nominal rate of return is dependent on the price position AT THE ENDING DATE, more than anything. If you end your year at a bad point, your 1-year return will be bad. So will your 5-year, 3-year, figures. etc. So it's not so surprising that a fund can advertise a great return for 1-year AND 3-year AND 5-year etc. It does NOT indicate truly consistent great management over a period of time.Now that inflation is extremely low, bonds aren't so bad, and stocks, especially OTC stocks, have been terrible. So a RECENT study would have results favoring bonds.And the "conventional wisdom" that I learned in school usually had a required rate of return for stocks that factored in a pretty healthy inflation factor. Now that's no longer true, so bonds would be favored more than they were previously.
Where the studies arguing the putative advantage of stocks over bonds go wrong is in looking at absolute returns rather than risk-adjusted returns. Typically they compare some broad market stock index (e.g., the SP 500) vs. some broad bond market index (Lehman's or whatever) and conclude, from the observable fact the the former has offered ~11% over 20-year rolling periods and the latter ~8%, that the former is the smarter investment/ better hedge against infaltion, which is nonsense or not, depending on how you think about markets and the purpose of investing/trading and the role yyou assign to risk in your evaluation metric.From my point of view, ther should be no difference in the returns available from either asset class
Several messages have mentioned risk as a mitigating factor against the performance of stocks (more so than with bonds, that is).Could someone explain to me how greater risk translates into a diminution of the larger percentage of money yielded in most traditional comparisons? In other words, if $10,000 in a stock index grows to a larger dollar figure over 10, 20 or 30 years than $10,000 invested in a bond index -- assuming that this is what happens, which is my understanding of history -- why should an investor ignore that larger dollar figure?
Studies arguing the putative advantage that accrues to stocks over bonds go wrong in looking at absolute returns, rather than risk-adjusted returns. Typically they compare some broad market stock index (e.g., SP 500) against some broad market bond index (e.g., Lehman's or whatever) and conclude from the observable fact the the former has returned ~11% over 20-year rolling periods where as the latter has returned only ~8%, that stocks are the smarter investment for the long haul and the better hedge against inflation, which, to be blunt, is nonsense. Risk is very real and not recognizing it and managing it is a sure way to blow up your account. Either asset class should offer equal returns ON A RISK-ADJUSTED BASIS, or else the arbs would step in to make it so. That's how markets work, but the curious thing is that isn't what happens, and bonds, on a risk-adjusted basis, can offer an excessive premium as Hinkman's studies concluded and Milken's work substaniated. True, we're now not talking about what most people are talking about when they are thinking of bonds, but junk bonds. But debt instruments are debt instruments and there is serious money to be made in bonds that rivals the returns of equities.The equation is simply this: If you want equity-like returns, you have to take on equity-like risks, where ever those opportunities occur. As for making decades-long predictions about which is likely the better place to be, stocks or bonds, that's way above my pay grade. I haven't the slightest idea, and I don't care. Or, to paraphase what Peter Lynch once said when asked how much time he gave to macro-economic factors:"If I spend 15 minutes a year worrying about such things, I've wasted 10 of them."Each person has to trade (aka, invest in) what they understand, what they have access to, what they have the skills to do, what they have the interest in doing. If you love the equity market and can make the money you need in stocks, go for it. Ditto for the debt markets and bonds. Make your choices on the basis of who you are as a person, becasue that is who you can be as an investor/trader. Don't worry about what some market guru says - academically vetted or not -will be the best place to be, this post included. Also, if you want "safe" bonds and think there isn't serious money to be made in them that can beat the "average" return of stocks, take a look at the returns Treasuries offered in '95 to those people who bought them in '94, or again the returns offered in 2001 by those who bought them in 2000. The numbers will shock you out of your beliefs that stocks are where the money is at.Caveat: If you're comtemplating moving into investment-grade bonds (Treasuries, governments, corporates, muni's, or whatever is primarily interest-rate driven as opposed to issuer-specific fundamentals) at this late date, realize that you are very late. The train has left the station. The ship has sailed. The plane has flown. But the economy will pick up in a year or two or three, or it won't, but eventually there'll come a time again when the stock market is on a manic jag (again) and the Fed is tapping the brakes (again) and beginning another tightening cycle, and bonds are despised (again, just as now they the market darlings and are overbought (again). Then will be the time to make your move into the asset class. Charlie
Good question.The straight-forward answer is that you can't buy yesterday's market.We always assume past is prolog, but, as the warnings all say, "Past performance is no guarantee..."There are dozens of ways to measure risk. An intuitive one is loss. Another is likelihood. If you buy $10,000 of a stock index tomorrow, at tomorrow's market price, as opposed to $10,000 of a bond index, which will return the bigger pile of money if left alone for 20 years? History suggests stocks. But during the intervening years, which is more likely to offer smaller draw downs? The bet you are making is this: you won't cash out at an intervening market low, which history also suggests is not the case. The average investor comes no where near to capturing the theoretically maximum available from markets and buys the high and sells the low.If, however, a person does have the discpline to make rational market decisions, which asset class is going to be the harder to manage for the typical investor, for whom investing is at best a very part-time activity? (E.g., my experience is that most people spend more time worrying about what bet to make in their company's football pool than they do about their 401k choices and allocations.)That's where risk, in the sense of volatility of returns, can make a huge difference. Bonds are a more forgiving asset class and with them it is easier to turn in steady, wealth-building results, all other things being equal. IMHO.It's not what you coulda, shoulda, woulda achieved that matters, but what you, in fact, did achieve. Stocks are sexy; bonds are boring, but steady can win the race over the long haul.Charlie
Studies arguing the putative advantage that accrues to stocks over bonds go wrong in looking at absolute returns, rather than risk-adjusted returns.Hi Charlie,I don't know from the threading here if this is a reply to my question, so I'll repeat it. How does risk reduce the dollars yielded by a stock?If a security is simply held for a long time, there is no "risk" of selling it at a low spot and repurchasing at a high spot. Thus, the volatility ("risk") of that security within any time frame is moot.If I recall correctly, the article that started this thread was talking about ROI. In other words, dollars and cents. And it referred to pension managers, who are not as likely to be LTBH investors as the typical small investor.Sidebars about inflation seem to be a digression. My question is excruciatingly simple. If you can turn $10,000 into $30,000 with Investment A -- or $50,000 with Investment B -- then how is investment B worse than investment A?
Chap,Stated that way, B is obviously the better investment. But what are the assurances that $50,000 worth of gains will actually happen, as opposed to $5,000 worth of losses? What you are ignoring is risk, the downside of each investment and the range of possible and likely outcomes. One easy way to estimate the "better" investment is to consider the risk-adjusted return that "might" be obtained from each investment. And one way to estimate this is the divide the expected return by the expected volatility, which is a rough interpretation of Alpha, one the the MPT [Modern Portfolio theory] tools for measuring better or worse.But, in truth, all estimates are just best guesses. Go with what you are comfortable with and makes the most sense to you in your own unique investment situation.Charlie
Could someone explain to me how greater risk translates into a diminution of the larger percentage of money yielded in most traditional comparisons? In other words, if $10,000 in a stock index grows to a larger dollar figure over 10, 20 or 30 years than $10,000 invested in a bond index -- assuming that this is what happens, which is my understanding of history -- why should an investor ignore that larger dollar figure? Your understanding may be valid for 20 or 30 year periods, but there have been a number of periods of 10 years or so when stock indexes (not dividend adjusted), have not grown at all, in fact even lost money. Assume that at the beginning of one of these periods you could make a $100,000 tax free investment in a 5% bond, and reininvest the interest received a the same rate of 5%, at the end of that ten year period, you would have $162,889 as opposed to a loss in the stock index fund.Dan
Chap, If you can, get a hold of a copy of the Winter 2001 "Investor Topics", a quarterly newsletter that Franklin Templeton sends to its shareholders.The issue is devoted to the question of diversification and they present a two page chart showing how various asset classes have fared on a yearly basis from 1980 to 2000. They use the 8 classes of lg stocks (aka,SP500), lg growth, lg value, small stock (aka, Russel2000), sm growth, sm value, and bonds, assigning each one a different color. The visual effect is a crazy quilt. Nothing emerges as a clear winner. Of the 8 choices, bonds were the best performing asset 3 out of 20 years and the worse 6 out of 20, but with only 1 year in which they lost money. In 1 of those bottom octal years their return was 22.13%! [They scored bottom because ever one else did even better, 1985.]Lg cap blend stocks were the top performer 5 out of 20 years, with 4 of them happening between 95 and 98, consecutively. They were the bottom performer 2 out of 20 years, down 9.81% in 81 and essentially flat in '93.One moral? 20 year time frames can't be used to predict what single asset class is going to do best going forward. Another? Investors are going to see in market history what they want to see, given the Rorschark (sp?) nature of the events and statistically invalid periods of time we are necessarily talking about, as Bogle and other love to harp on. A third? Any asset class will get you there if you use it appropriately and trade/invest smart.Charlie
Why should an investor ignore that larger dollar figure? Because, with stocks, that money is less likely to be there _at the moment you want it_.
HiHere is a link to very interesting article from Pimco explaining why over the next decade or so bonds may outdo stockshttp://www.pimco.com/bonds_commentary_investmentoutlook_recent_index.htmDan
"Why should an investor ignore that larger dollar figure?"Because, with stocks, that money is less likely to be there _at the moment you want it_. That's not what my question was about. You're talking about liquidity. My question was about mathematics, pure and simple, and whether risk had a dollar value that I had missed somehow. But we've established that $50,000 at the end is indeed greater than $30,000, no matter whether one gets there in a straight upward climb, or by a roller-coaster ride of scary ups and downs along the way. That is all I was trying to confirm.
Dan,Excellent article at the Pimco site. Thanks for the tip!BTW, Jack Brennan (CEO of Vanguard) was on Wall Street Week recently and said that he expected high-single digit yields for the foreseeable future. That's 8-9% vs. the 5% claimed by the Pimco guy, but one thing worth noting is that I think both were talking about the total stock market.Some sectors will no doubt do better than others, and with individual stocks there is still the chance for a better ROI. There is no reason to believe that a new company could not go into business next week with the proverbial "better mousetrap", and grow that business at rates that would attract double-digit stock market investment. People reading this board are presumably focused on bonds, but in any case the point should be noted before one makes any generalizations about "stocks" and "bonds", as if all stocks were identical in performance.
(FROM THE PREVIOUS)the point should be noted before one makes any generalizations about "stocks" and "bonds", as if all stocks were identical in performance. ----------Ditto that caveat about bonds. When Gross (of PIMCO), Fuss (of Loomis Sayles), or MacKennon (of Vanguard) - all very superior bond fund managers - talk about expected returns of 5-9%, or whatever, they're talking about the investment-grade stuff or a bond composite index. They aren't talking about the range of returns possible from owning individual issues of bonds, which can run as high as 60%. (E.g., this is where Global Crossing bonds are currently price to yield to maturity, and, disclaimer, I hold a position.) What's the likelihood of actually achieving that return? Less than half would be my guess, which is the conclusion one should to draw from their steep discount to par. The bonds are being priced on their expected payout ratio from bankruptcy. Who's right? Who's wrong? Is the option worth buying? because that's what junk bonds are, an option, with your cost being the price you paid minus your payout ratio, and your premium being par plus any interest payments that might happen. Ultimately do the numbers make sense? Probably in the same way that investing in tech stocks can pay off if you're careful and trade/invest smart. But anyone who says there isn't serious money to be made in bonds that rival the returns of equities, on a risk-adjusted basis, hasn't looked at them very closely.Are bonds or stocks better for the long haul? Who knows? Who cares? What matters for each individual investor/trader is what she/he can do with the opportunities that will occur in either asset class. Trade/invest in what you know and what you like and what you understand. That's where the money will be for you, predictions about the returns various asset classes might or might not achieve going forward, notwithstanding. For small investors - which, in all honesty is most of us - who lack the research and trading facilites of the big money players (e.g., the pension funds, whose viewpoint is truly long term with the discipline and resources to follow through) those kinds of predictions are entertainment, not bankable information. They're fun speculations, not useful guidence. Charlie------"He that can not abide a bad market deserves not a good one."(Old English proverb, unattributed.)
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