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So far this century, bonds have outperformed stocks. While interest rates are low historically right now, so are stock dividend and EPS numbers. Stocks are just as expensive as bonds, in other words.

In the 20th century, especially when the bond bear market of 1940-80 is factored in, stocks outperformed bonds. But is there any reason why this might reoccur in the 21st century?

You should expect a greater return from stocks than bonds before adjusting for risk because stocks are riskier- if the issues goes bankrupt, bondholders get paid before shareholders, for example.

But on a risk adjusted basis, when you hold a diversified portfolio stocks/bonds and factor defaults into the mix, will stocks still outperform? Is there anyhthing magic about them?

I welcome any thoughts on this. Thanks.

Nick
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Interest rates seem likely to rise soon. That will cause bond prices to step down a few notches. I would think bonds will beat stocks only if some major event causes stocks to crash.

Its an election year. The administration would have us believe that the recovery is continuing quite well. Rising interest rates might cause hesitation in the rate of increase, but I would be surprised at a major downward correction.

On a percentage return basis, stocks will probably not do as well this year as last year. The gains will be selective. And some will continue to struggle. But I still think stocks will out perform bonds--though maybe the differences will not be large.
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<<In the 20th century, especially when the bond bear market of 1940-80 is factored in, stocks outperformed bonds. But is there any reason why this might reoccur in the 21st century?>>

Here's a good Bernstein article that attempts to answer your question

http://www.efficientfrontier.com/ef/701/cheap.htm

In short, Bernstein expects Investment-Grade Corporate bonds, and TIPs to outperform Domestic LC

A caveat:

"Understand that "expected" returns are just that. In finance, as in life, there is often a huge chasm between what is expected and what actually happens."

Regards,

Ben
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Thanks, great read. Sounds like he projects corporate stocks and bonds to perform about equally going forward based on current yields, growth, default rates, etc.

Nick
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