The Tortoise Beats the Hare/ Bonds Beat Stocks!

[Brokers Alliance]

The Tortoise Beats the Hare

What’s the impact of the market mayhem of the last three years? Bonds beat stocks over the last thirty years. Long haul investors and savers will read the headlines, make the move to bonds and think twice about playing the stock market. The paradigm has just changed! Bill Gross is a god. And fixed insurance products will get a boost.

The bond bell weather indicator, The Ibbotson Associates SBBI bond index, put serious points on the board with returns at 28% versus the S&P 500 2.1% for 2011. The 30 year score card was 11.03% bond index versus 10.98% for stocks! That’s history and not the future, but it is a wakeup call. Interest rates are low and may continue low, but the boring turtle won the race, so “slow and steady wins the race” after all.

The hare that ran the losing race thought he had plenty of time. He can always catch up. The competitor is a loser. But the dead carcasses of the fleet footed hare lay on the side of the highway, just decomposing road kill…like many portfolios of the boomers. Thirty years ago, advisors told the boomers to play the market and take it to the bank. But it was bankrupt portfolios thirty years later and now bonds…boring bonds never looked so good.

Watching the underdog, no insult to the tortoise intended, cross the thirty year finish line breathes new life into long horizon savings strategies and the vehicles to take you there are tax advantaged, guaranteed insurance products. Like the tortoise’s hard shell protection many of these products feature principle protection. Today I’m purchasing an aquarium for my new pet turtle. I’ve named him, “Slow and Steady.”

 

[xrac]

The 30 year score card was 11.03% bond index versus 10.98% for stocks!

10.98% if you didn't buy high and sell low. Where does Dave Ramsey get 12% from mutual funds? The average investor gets less than the market averages.

 

[medsuptage]

Bonds go up when stocks go down

stocks go up when bonds go down.

Simple.

Plus you're not going to build a strong retirement or become wealthy off of bonds. You have to take a bit of risk if your looking for above average gains.

Their pretty safe and for the most part secure investments but unless your dumping obscene amounts of cash into them, they shouldn't make up a large part of your portfolio in my honest opinion.


I really doubt we'll ever see the day people abandon stocks and go bonds.

 

[BNTRS]

My theory is bond yields will stay low and stock prices will be very slow to increase. Average age of America is shifting up, meaning bigger and bigger shift to bonds. More money going into bonds loads toe liquidity market with cash, which pushes interest rates down. The shift away from stocks pushes their prices down as well.

Now, the fed can attempt to yank liquidity out of the market (baffles me how little people understand how that process works) but it's proven unwilling to do that for quite sometime.

Big enough shift to force us to re-evaluate the parameters of expected value for certain assets? Maybe...but there's a lot of data to sift through on that one.

 

[VolAgent]

Please expand on what you mean about the Fed removing liquidity. I know what comes to my mind, but that may not be the same as what you mean.

 

[russelltw]

removing liquidity from the market by the Fed can be done by increasing interest rates. Meaning money is more expensive to get (ie higher interest rates on loans). That can slow the economy by making it more expensive to buy car, homes, etc.

The gov't has been pumping money into the market right now with lower interest rates, but banks are making it harder to get loans. Getting a loan now is like it was in the 1980's - 20% down and basically have a lot of cash on hand. I refi-ed a rental property 2 years ago right as the banking sector was getting tight on loans. The house in one a long dirt road with about 20 other houses. The mortgage company wanted me to get a letter signed by everyone living on the road to agree to maintain the road before the loan closed. We went back and forth and finally they again not to require it.

There's more to it, but that's a start.

 

[BNTRS]

removing liquidity from the market by the Fed can be done by increasing interest rates.

Not exactly, the fed does not have direct control over rates (i.e. it doesn't set them), it targets them. It does this by either selling treasuries (taking money out) or buying treasuries (putting money back in).

The problem this creates (and the big criticism the gold standard types have against fiat money systems--the system upon which monetarism is built) is that there are other forces in place that will (in theory) counter-act the efforts of the Fed (things will constantly push back to equilibrium).

A great example of this playing out is the freezing of the liquidity market in 2008 despite massive amounts of cash infused into the liquidity market by the Fed. Rates plummeted and yet little happened to spur economic activity.

It's easier for the Fed to stop things than it is to kick them into motion (and as such, it's easier for them to do harm than good). Sometimes harm can be a good thing, it can be argued. Paul Volcker's greatest accomplishment was throwing the economy into a recession by sucking massive amounts of money out of the market and causing a significant jump in interest rates. The theory was money was artificially cheap and needed a counter balance (that's exactly what he accomplished). The consensus on this was he stopped what could have been a massive degree of inflation. This consensus comes (in part) from an interpretation of the research Milton Friedman did (and for which he was awarded a Nobel Prize in Economics), which identified a long term relationship between money supply and price levels (i.e. inflation). Meaning, there was way too much money available and removing it was key in preventing a massive inflation take off.