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In this months "Stages" magazine, Peter Lynch maid a claim about bonds that surprised me and I hope that someone here (TMFPixy, maybe) can explain.

Lynch said, "In the 10 years from 1972 to 1982, for example, both government bonds and money markets outgained stocks."

Do you think Lynch is ignoring dividends paid out by stocks, or do you think he is counting both capital gains and dividends? I remember reading (I'll try to check my library tonight) that stocks have outperformed all other "normal" classes of investments in any 10 year period since 1920.

thanks in advance,
John Power
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I think he's right and dividends don't affect the conclusion. If you go to quote.yahoo.com and pull the Dow chart for "all data" or some such, you will see the Dow was at 1000 in Jan. 73, went to 600 towards the end of 74, and didn't get back to 1000 until 77 where it proceeded to stagnate.

I was in TIAA-CREF at the time and followed their management's recommendation to allocate my contributions evenly. For a few years I kicked myself for not being 100% in TIAA (the bond fund). Now it's worked out to 25% TIAA, 75% CREF (the stock fund). In retrospect I'm glad I did nothing, because the rules are you can transfer from CREF to TIAA but not the other way.
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John, you ask:

In this months "Stages" magazine, Peter Lynch maid a claim about bonds that surprised me and I hope that someone here (TMFPixy, maybe) can explain.

Lynch said, "In the 10 years from 1972 to 1982, for example, both government bonds and money markets outgained stocks."

Do you think Lynch is ignoring dividends paid out by stocks, or do you think he is counting both capital gains and dividends? I remember reading (I'll try to check my library tonight) that stocks have outperformed all other "normal" classes of investments in any 10 year period since 1920.


No, he's not. For the 10-year period ending 12/31/82 the S&P 500 total return averaged 6.7% per year. Government intermediate term bonds averaged 8.0%. The money market averaged 8.5%. But what Lynch didn't tell you is that inflation averaged 8.6%. In effect, then, nothing won in terms of purchasing power in that decade due to double-digit inflation.

Regards….Pixy
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TMFPixy wrote:

//For the 10-year period ending 12/31/82 the S&P 500 total return averaged 6.7% per year.//

Sorry to be so think headed here, but are you using "total return" to mean capital gain + distributions? (i.e. If I put $10,000 into the S&P 500, had all capital gain distributions and dividends reinvested, at the end of "the 10-year period ending 12/31/82" I would have: Total = $10,000*(1+0.067)^10 = $19,127, right?)

If so then I thank you for the education! I always thought stocks outperformed bonds in any 10 year period.

I remember discussing a series of articles here (back in February) that claimed the best (defined as maximum returns) retirement asset allocation was a 100% stock portfolio. The articles had some detailed tables comparing the 100% stock strategy with modern portfolio theory's strategy of a mixed basket of stocks and bonds -- starting in 1968 I think. Do you think that Lynch's observation has any relevance to the analysis done in these articles?


----John Power
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>In effect, then, nothing won in terms of purchasing
>power in that decade due to double-digit inflation.

Except the Fool4! ;)

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John Power, in a follow-up post, writes:

TMFPixy wrote:

//For the 10-year period ending 12/31/82 the S&P 500 total return averaged 6.7% per year.//

Sorry to be so think headed here, but are you using "total return" to mean capital gain + distributions? (i.e. If I put $10,000 into the S&P 500, had all capital gain distributions and dividends reinvested, at the end of "the 10-year period ending 12/31/82" I would have: Total = $10,000*(1+0.067)^10 = $19,127, right?)

If so then I thank you for the education! I always thought stocks outperformed bonds in any 10 year period.

I remember discussing a series of articles here (back in February) that claimed the best (defined as maximum returns) retirement asset allocation was a 100% stock portfolio. The articles had some detailed tables comparing the 100% stock strategy with modern portfolio theory's strategy of a mixed basket of stocks and bonds -- starting in 1968 I think. Do you think that Lynch's observation has any relevance to the analysis done in these articles?

I reply:

Yes, total return does mean the reinvestment of capital gains and dividends, and $10K invested in the S&P 500 at the beginning of that decade would have grown to $19.1K. And it's true when you're looking at broad market indices, stocks can lag behind government bonds as they did in that decade. It doesn't happen often, but it does happen. As I recall, in all rolling 10-year periods since 1926 stocks win 93% of the time, but lose 7%. It's even higher since 1946.

I don't remember the February discussion and am too lazy to look it up. <g> As to the relevance of Lynch's observations, it depends. Check out the series of messages and the analysis I did in the Retired Ralph Redux portfolios during that same decade. Here's a link to the 20-some-odd messages under the topic Retiree Portfolios in this folder: http://boards.fool.com/registered/Message.asp?id=1040013000079000&sort=postdate . You'll see that the Foolish Four didn't do half-bad in that decade. Indices paint a general picture, but unless that's what you invest in, then they don't paint the specific portrait. Therefore, the observations are relevant only insofar as that's how you invest.

Regards….Pixy

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Richard612, in an effort to tweak Pixy's nose, writes:

>In effect, then, nothing won in terms of purchasing
>power in that decade due to double-digit inflation.

Except the Fool4! ;)

To which Pixy replies:

Hey, not so hard! So I forgot to point out that some stock investments can and do beat the S&P 500 and also stayed ahead of bonds in the decade under question. At least I provided a pointer (albeit belatedly) to a study that shows that fact. I should get some points for that. <g>

Regards….Pixy
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