The Best Investment of the Decade

Kyle Hartman's picture

Wednesday, August 19, 2009 - 6:07pm

by Kyle Hartman

Conventional wisdom is that stocks outperform bonds.

That's wrong.

Fact: Investors who buck conventional wisdom and buy bonds are more likely to see better results than investors who focus solely on equities.

Don't let anyone tell you that bonds are staid, stodgy or that they'll underperform the S&P 500. If you've heard any of these three excuses about why you should invest in stocks instead of bonds, you're getting lousy advice -- advice that is reducing your returns and taking dollars out of your pocket.

Excuse No. 1: The only reason bonds look good these days is because stocks took such a major hit in 2008.

Reality: Bonds have trounced stocks for the past five years.

The Lehman Aggregate U.S. Bond Index, which measures investment-grade bonds, returned +22.8% during the past five years. The S&P 500 lost -11.0% in that period, according to Ibbotson & Associates, an authority on asset allocation. (S&P returns exclude dividends.)

Investors who bought $25,000 worth of investment-grade bonds at the beginning of 2003 ended 2008 with $30,700, a gain of $5,700. S&P investors lost -$2,750.

Excuse No. 2: Stocks' good years more than make up for the bad over the long run.

Reality: The picture for stocks doesn't get better over time -- it gets worse. Much worse.

Bonds returned +70.4% during the past 10 years. Stocks bled -28.7%.

Here's what those percentages mean in dollar terms: A $17,600 gain for bond investors and a loss of $7,175 for stock jocks.

And during the past 15 years -- just in case you're still skeptical -- bonds continued to outperform gaining +152.2% versus the stock market’s +147.1% return.

Excuse No. 3: Bonds are difficult to understand and expensive to buy.

Reality: That might have been true once, but times have changed.

Exchange-traded funds, or ETFs, provide investors with easy access to the bond market at a low entry point and with automatic diversification. These funds also provide management. Investors can choose a fund based on its objective -- T-bills, say, or high-yield corporates -- and leave the specifics to the pros.

The conventional wisdom that stocks beat bonds is dead wrong. It's the financial equivalent of the tortoise and the hare. We all know how that turned out. Smart investors -- that is, rich ones -- know better.

Kyle Hartman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.