When Bonds Beat Stocks
Bonds beat stocks over 30 years. Yes, you read it right. Bonds beat stocks. Let me explain.
You may have heard that the better long-term investment is stocks. Sure, they are riskier, but given time the risk is rewarded by return. Bonds are less risky, but also have less return. Well, not always.
At the end of October, measuring back 30 years, bonds had a better return, on average, than stocks.
Hmmm…I’m thinking that 30 years is a long time. And stocks are supposed to be the superior long-term investment. So what’s wrong here?
Nothing really. Stocks still, MOST of the time, are the better long-term investment. In fact, every 30-year period going back well over 100 years had stocks outperforming bonds. The last time bonds beat stocks over a 30-year timeframe was in 1861.
Still, some would say, things are different now. Because of the financial crisis and all, stocks just aren’t what they used to--this proves it. Smart folks will get out of stocks and into bonds for the long-term, right? Well, just because some say that doesn’t make it true. That’s because what caused bonds to do so well over the last 30 years won’t work for the next 30.
Try to remember what it was like 30 years ago. That was 1981, and we were experiencing some of the highest inflation this nation has ever seen. Prices were going up 10, 12, even 14% per year. And keeping pace were bonds. Just like inflation, interest rates were high—very high. Fast-forward to today. Interest rates (and bond yields) are low—very low.
Over the past 30 years, interest rates have fluctuated from high to low, and that gives us the two reasons why bonds recorded such a good return. First, for much of the first part of the 30-year period, bond interest was high. That helps. But what helped even more was the drop in rates. You see, as interest rates drop, the value of bonds go up, creating favor for the bonds in two ways. They began by paying high levels of interest, and then as interest rates came down, you actually saw bonds growing in value, creating capital gains.
Now, look around you today. Are bonds paying stellar rates? Nope...they hardly pay anything. Next, do you think that interest rates are going to drop 6, 8, or 10% from here? Impossible. To do that, lenders would have to pay you to borrow—and while that would be a nice change, I don’t see it happening anytime soon.
So, while this made for an interesting statistic about the last 30 years, it’s not something you’d want to hang your hat on for the next 30.
This article was published in the Wichita Falls Times Record News on December 4, 2011.
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