Stocks vs. Bonds: Long-Term and Short-Term

Bonds were the rock of support for portfolios in 2008. Investor interest in bonds has increased as a result. Asset allocation going forward in the near-term may be more heavily weighted for bonds than before, particularly for investors who are currently relying on income from their portfolios to support their lifestyles.

Here are charts for the Vanguard S&P 500 fund (VFINX) versus the Vanguard US Aggregate Bonds fund (VBMFX) for multiple long-term and short-term periods. For ETF investors, IVV or SPY are S&P 500 proxies, and AGG or BND are US aggregate bonds proxies.

Comments

[User 86999:]

Richard, great charts, but it would be nice to include your opinion on how to incorporate the monthly distributions to complete the picture. The price charts above are ex-dividend price behaviors. So, including the monthly payments will substantially strengthen the case for bonds, I think.

Jan 09 09:37 AM

[CAPT GW:]

There is another next set of charts that Richard didn't post -- the equivalent 50 and 100 year performance comparisons, and then a set of global markets comparisons, and comparisons to select baskets of precious metals and other commodities.

But it seems intuitive that ownership (i.e., equity) markets are going to much more unstable as the US economy adapts to multiple sea changes -- (1) an aging US population that will turn the social safety net into an inverted pyramid; (2) the unprecedented population implosion forecasted for our major trading allies over the next 70 years (Europe and Japan first, then the rest of the westernized economies of the world), which will be far more dramatic than in immigrant friendly nations like Canada, the US, Australia and New Zealand; (3) the economic and military and diplomatic surge of a largely-totalitarian communist China; (4) a universal, all-nations, surge in government debt and government deficits never seen in modern times; (5) an ongoing population explosion taking place the most unruly and restless parts of the world, which is leading to a deterioration of the rule of laws, the rise of an international criminal class, and to anti-social behaviors on a scale never known before and which is transpiring in the least industrialized and most resource rich parts of the world, implying that industrialized commerce will eventually be held hostage to critical commodity shortages and left to do commerce with resource-rich "thugocrats"; and (6) the eventual islamization of the European Union as the pre-WWII and Boomer generations die off and leave their pint-sized pool of descendants and scions to compete with a burgeoning population of (largely unassimilated and non-Westernized) muslim immigrants.

Add to the above list the unknown wild cards of climate change induced catastrophes, the potential failure of preventive health measures to forestall pandemics, international instability, and the rise of techno-terrorism, and the future risk environment looks about as risky as it ever did during the Cold War -- perhaps even more so, because the possible outcomes and paths to catastrophe and demise are now more numerous than they ever had been.

And all of this will take place as Boomers age and invest for the long haul. Seems like investing in gold, chain-link necklaces is going to become a catastrophe hedge. The mattress should also be part of a sound asset allocation strategy, too. But then maybe I'm just being exceptionally pessimistic.

Jan 09 10:37 AM