About a month ago I read a very interesting article in the Wall Street Journal. To me it is one of the most interesting things that I have read in a quite a while. The article is entitled, “Stocks or Bonds? The Pros Say……” on page R1 of the January 9th WSJ. The article advocates that equities are the better long-term investment in general and especially now based on current valuations. The most interesting thing about the article is a graph showing 30 year returns starting in 1926 and ending December 31st, 2011 for both the S& P 500 and government bonds/treasuries. There are 56 30-year periods ending from 1956 to 2011. From this chart I noticed the following. 1)Stocks outperformed bonds in 55 of 56 30-year periods. No surprise there. 2) Over long periods, such as 30 years, the return from stocks are less volatile than the returns from government bonds. 3)The 30-year period ending December 2011 was the only 30-year period where the return from government bonds outperformed equities. From 1981 to 2011, government bonds returned 11.03% and equities returned 10.98%. Not much to comment about on the first observation, that is what most of us have been taught to believe. The second observation is more interesting to me. A box in the graph states that the 30-year returns for stocks have varied from 8.5% to 13.7%. From looking at the chart the return for bonds, over long periods, has been much more volatile. They have returned less than 2% in 3 30-year periods ending in the late 60’s and early 70’s. In fact bonds did not return above 4% in a single 30-year period ending from 1956 to 1984. From 1985 t 2011, the bonds have returned more than 4% in every period. The variation in return for bonds over these longer periods is much more variable than that of stocks. If you subtracted inflation, the variation in real returns would be even greater. In some 30-year periods the returns from equities were 5 to 6 times as great as bonds. In fact until 1986, the 30-year returns for stocks were at least twice that of the government bonds. The third observation, that the 30-year period ending in 2011 was the only period where bonds outperformed stocks, makes me think that we are probably near the beginning of a long bond bear market. A few days ago, I read where the head of Blackrock, one of the biggest investment management firms, advocated a 100% equities asset allocation based on valuations and the current rates on bonds and cash equivalents. Then today I read an article on Bloomberg where Warren Buffett called bonds the most dangerous asset. According to the article this is a quote from Buffett’s annual letter to shareholders, “Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.” In addition to the low rates offered on treasuries, I read this week that McDonalds was floating a 30 year bond at 3.75%.
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