So much for the equity risk premium. “Boring” bonds have outperformed stocks over the past three decades, according to a report this week, turning economic theory on its head.
Bonds recently surpassed stocks’ long-term performance over the last 30 years, Matt Krantz for USA Today reports.
“No one thought the tortoise could catch up, and it just did,” Ken Winans of Winans International said.
In 2011, the Ibbotson Associates SBBI bonds index, a broad bond index, vaulted 28%. In contrast, the S&P 500 returned 2.1% with dividends. The bond index also outperformed stocks over the past 10 and 20 years.
Additionally, the bond index showed an average 11.03% annual return over the past 30 years, whereas stocks averaged 10.98%.
The iShares Barclays Aggregate Bond (NYSEArca: AGG) and Vanguard Total Bond Market ETF (NYSEArca: BND) both tacked on over 7% in 2011, while the SPDR S&P 500 (NYSEArca: SPY) gained 2%.
After taking on double-digit losses in four instances since the tech bubble, investors are more conservative. Additionally, the baby boomer generation is easing into retirement, and they are taking on less risk and more income generating assets, Winan added.
“People are looking at the (stock market) and seeing the casino component,” Bill Larkin of Cabot Money Management, said in the USA Today article. “They’ve taken big hits.”
The 30-year trend of lower interest rates and inflation has also helped bolster bond investments.
Larkin in the report also warns that the Fed’s decision to hold interest rates down will eventually reverse. Furthermore, inflation risks will also end bonds’ attractiveness. [Treasury ETFs Stumble Into 2012]
With bonds outperforming stocks over a 30-year period, “the first thing it tells you is you’re probably at the most expensive bond market in our lifetime,” Larkin said.
I’m in the camp that Treasury yields will rise in 2012. With bond funds and ETFs seeing such big inflows last year, it makes me wonder how many investors are truly prepared for rising rates. [5 ETF Trends to Watch in 2012]
iShares Barclays Aggregate Bond
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Max Chen contributed to this article.