Saturday, March 29, 2008

Do Stocks Outperform Bonds?



Investor folk wisdom preaches that stocks outperform bonds. Therefore, choose stocks when you need growth.

This chart shows results for an investor who put $10,000 into each of three Vanguard funds roughly ten years ago: Total Stock Market Index and the Total Bond Market Index, which reflect the US market, and Total International Stock Index.

Investments would have grown as follows:
Total International Stock Index $20,527
Total Bond Market Index $17,546
Total Stock Market Index $15,477

Few investment advisers would have counseled the investor to put all the money into the international fund, so they would, in effect, have steered the investor away from the most profitable investment. Most would have advised the investor to put everything into the domestic stock fund, which was the least profitable course of action. Others might have advised the investor to use asset allocation to dampen some of the volatility of the stock funds by splitting the investment between stock and bond funds.

The point?

Apply critical thinking to folk financial advice! Bonds can outperform stocks! Equally important, bonds can give some protection against market volatility. Look at the chart for 2003. An investor who needed money for an emergency would have been in bad shape if all the investment had been put into stocks.

Conclusion: Stocks might outperform bonds, or they might not! It all depends on a lot of other factors which you need to consider as you plan your strategy.

No comments: