The “Ahead of the Tape” column in The Wall Street Journal on Oct. 8, 2002, presented some interesting statistics regarding the relative performance of stocks vs. bonds over the past 15 years.
The total return for the Standard & Poor’s 500 stock index from the end of the third quarter of 1987 through September of this year was 264%, compared with 382% for long-term Treasury bonds over the same period.
Annualizing these figures, bonds compiled a total return of 11% a year, while stocks appreciated 9% a year.
Although we are pleased that bonds are earning newfound respect, we think this type of comparison has a tendency to distort some of the most important fundamentals of investing.
We are concerned that bonds are too often discussed as an alternative to stocks, rather than as a staple of any diversified investment portfolio.
It’s not “either/or”
If there was a lesson to be learned from the stock market’s collapse, it is that the fundamental rules of investing should never have been ignored.
A properly constructed investment portfolio should have an allocation of stocks and bonds. Stocks for growth, complemented by bonds, which provide balance and cash flow.
The longest bull market in history gave rise to a generation of financial advisors and journalists who had never experienced the devastating effects of a bear market. This new breed came to believe that diversification was accomplished by spreading investment dollars throughout a variety of stock sectors. Their thinking was that the more conservative blue chip stocks would provide shelter from a down market when the more aggressive growth stocks in their portfolio started to falter.
We are hopeful that when stocks start to rise again, these advisors will have learned the lessons of the recent past.
A good start would be for the financial media to end its preoccupation with stocks vs. bonds comparisons. The investing public would be better served by illustrating how these two investments complement each other in a well-designed portfolio.