Bonds beat stocks?

I used to read Andrew Tobias’s blog for investment advice, but in recent years I’ve read it for political commentary and general entertainment. In the meantime, though, Tobias’s friend, “the estimable Less Antman,” has been taking up the slack.

In the latest issue of his online newsletter, Antman takes issue with an article in the Journal of Indexes (I must have missed that issue...) which maintains that bonds outperformed stocks over a recent 40-year period.

Though bonds are certainly less volatile than stocks, Antman argues that they have serious shortcomings as a long-term investment. While most investors fret over stock market crashes, they tend to underestimate the much greater threat that a too-conservative portfolio will simply fail to grow enough to meet their needs.

Just as they have done in virtually every 40 year period in American history, stocks beat bonds over the last 40 years, and by a clear margin of nearly 1% per year (9.0% vs 8.1%).  Because of the effect of compounding, this difference is hardly insignificant: each dollar invested in the Lehman Aggregate Bond Index (or equivalent) at the beginning of 1969 would have grown to $23 by the end of 2008, while a dollar invested in the Standard and Poor’s 500 Index of large US stocks would have grown nearly 40% more, to $32.  Strangely, this was the SMALLEST margin of victory for stocks since the 40 years beginning 1822 and ending 1861.  Over the course of American history, an average 40 years saw a stock investor end up with nearly five times as much money as a bond investor.