A pair of ugly recessions and a bullish climate for government bonds and bond-related exchange traded funds (ETFs) has helped stick a fork in the notion that stocks will always beat bonds in the long run.
Conventional wisdom has said that over the long haul, equity beats bonds. However, over the last 10, 20 and 40 years, this hasn’t exactly been the case, says Rob Arnott, founder of investment consultants Research Affiliates. The S&P 500 has actually yielded a return of -2.5%, whereas the Vanguard Long-Term Treasury Fund has gained 7.2% annualized over the same period, reports John Spence for Market Watch.
Granted, the burst of the dot-com bubble and the financial crisis of 2008 played pivotal roles in these numbers.
Arnott’s statements have sparked a duel between him and Jeremy Siegel, a finance professor at the Wharton School. Siegel says government bonds are not where investors should want to be right now. However, corporate bonds – both high-yield and investment-grade – are experiencing a resurgence.
Whether Arnott or Siegel turns out to be right, it doesn’t mean we should all head for the hills and give equities the cold shoulder. In fact, right now there are many valuations that investors are finding attractive, and we’re seeing a number of areas go above their 200-day moving averages.
The best way to settle this argument is to have a strategy of your own, instead of consistently banking on one thing to go your way in all circumstances (for example, hanging onto bonds come hell or high water because historically, they’ve been outperforming).
Strategies enable you to weather both the good and the bad times, and not worry about the “historicals.” We watch the trend lines so we can see those areas that are moving and get in for a potential long-term uptrend; we’re out when the trend drops below its 200-day or 8% off the recent high.
Kevin Grewal contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.