Bond Returns Beat Stock Returns for Last 30 Years

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Bond Returns Beat Stock Returns for Last 30 Years

From Bloomberg --

For three decades, owning equities in developed countries
earned more than “on-the-run” 30-year government bonds. The
advantage reversed after $36 trillion was erased from equity
markets since October 2007 amid the first simultaneous recessions
in the U.S., Europe and Japan since World War II.

The Ryan Labs
Total Return Indices, which track bonds by continually adding the
most recently sold security and removing the old one, returned
1,479 percent in 30 years. It beat MSCI’s Gross World index of
buying developed market stocks and reinvesting dividends, which
added 1,265 percent.

“Over the last 30 years there’s been no risk premium,”
said Douglas Cliggott, manager of the $81 million Dover
Long/Short Sector Fund, which has beaten 92 percent of its peers
this year. “It’s potentially earth shattering because the equity
market hasn’t delivered the goods.”

The returns are a reversal from October 2007, the peak for
global stocks. The MSCI gauge rose 2,845 percent to a record 17
months ago, more than double the 1,156 percent gain for
Treasuries from 1979.

Stocks generally are riskier than bonds, and their higher risk is
usually rewarded with higher (though more volatile) returns. Stocks'
occasional extreme volatility helps explain anomalies such as the
present one. It probably reflects an historic overshoot in bond prices,
coupled with the second-worst equity bear market of the past 100 years.

Three take-home messages from this rare financial constellation. (1)
Government bonds are scary overvalued. (2) Equities are probably
unacceptably risky for most investors, without some sort of timing
discipline. Even a plain old 200-day or 12-month moving average, while
it won't improve returns, will at least trim the most extreme
drawdowns. (3) The old 'balanced investing' formula -- 50 percent
stocks, 50 percent bonds, rebalanced at least annually -- looks pretty
good at times like this. That recipe would have been moving some
capital from stocks to bonds in 2007 ... and now would be moving
capital in the other direction, from outperforming bonds into
underperforming stocks.

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