The Stocks Catch The Bonds - 6.5 Years Later

Includes: EFA, EWC, SPY
by: Dale Roberts

The year 2008 provided a very poor start date for monies invested in most stocks.

From 2008, a typical bond heavy portfolio has outperformed a balanced and balanced growth portfolio that would offer double or more the stock exposure.

Sometimes, the market announces that we proceed with caution - is this one of those periods where perhaps returns will be nil or minimal in the short-to-mid term?

According to the Shiller Index, this is the third-most expensive market in market history.

We all know that stocks are the best-performing asset class over the longer term. That does not mean that they will always deliver incredible inflation-beating returns over longer periods, but they're still our best bet.

And what must be stressed here is the term "longer term". Stocks can be quite mediocre to "stink the joint out" in certain periods, depending on your start date.

Stocks have had a tough run from the year 2000, at least if we go by the U.S. stock markets as the measure.

The total return for the period of 2000 to the present is under 74% for the 14-and-1/2 year period, working out to a 3.9% annual return. The year 2000 was a real bad start date; investors would have had to wait some 11 years to get above water (and stay above water). That takes a lot of patience. And that bad start date can last for a few years.

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As I have wondered in this article, "There's No Money To Be Made From Here, Maybe", is 2014 akin to the year 2000? Will we see some very poor returns from 2014 over the next 5 to 10 to 15 years? Only time will tell.

Another poor start date was the year 2008, and that happens to be the year that we launched our index-based portfolios. The Great Recession was gathering steam.

The markets had begun their fall and investors saw the second-worst market decline, the only greater decline being the meltdown in the Great Depression. From top to bottom, the broad market S&P 500 fell by over 50%, ditto for the Canadian and international markets.

The Tangerine Portfolios offer a real-world study of asset allocation as it relates to risk and portfolio recovery times. Surprisingly the bond-heavy portfolio (70% bonds to 30% stocks) has been the top performer with respect to funds invested back in January of 2008. It is only when the end of June 2014 numbers were calculated that we saw the Balanced (60% stock) and the Balanced Growth (75% stock) overtake that bond portfolio.

OK, statistically this may now be a dead heat for monies invested from inception. And of course, most investors have made much more over the last 6.5 years invested in the Balanced Growth and Balanced Portfolios, because they've been dollar cost averaging along the way. Of course, dollar cost averaging may be the most sensible and useful investment strategy known to investorkind. Investors in the bond heavy portfolio might have seen total returns in the 6%-7% area, in the Balanced Portfolio 8%-10% annual returns and 11%-13% annual returns for those who have been investing along the way in the Balanced Growth Portfolios. Returns, of course, will vary depending on how much each investor invested at each stage.

The more stock-heavy portfolios have caught the bond portfolio, but that doesn't mean a pure stock portfolio would have overtaken the bond portfolio - quite the contrary. The asset mix of the S&P 500 (NYSEARCA:SPY), the Canadian markets (NYSEARCA:EWC) and the International index EAFE (NYSEARCA:EFA) would only have delivered a very modest sub-25% total return and annualized returns below 3.5%. The rebalancing of those equity classes would have lowered returns, trimming SPY and moving the funds into lesser-performing Canadian and international markets. Of course, we saw the Canadian and international markets drastically outperform the U.S. market from 2000 through the recession; the U.S. markets have had the most robust recovery coming out of the recession.

On the all-stock vs. bond-heavy portfolio, how long will it take for the stock portfolio to show that it was a better investment for dollars invested in January of 2008? Will it be 7 years, 8 years, or if there is another stock market correction, perhaps it will take 12, 13 or more years for the stocks to catch the bonds from 2008?

In the "There's No Money To Be Made From Here, Maybe" article, the general thesis, of course, is that there are certain times when a stock or a market is "obviously" overvalued and it does not offer the probability of a justified and deserved long-term gain. Benjamin Graham certainly warned against overpaying for a company or a market. And there are probabilities of low returns when one purchases the market at high valuations - as per market history price-to-earnings and the ensuing returns studies.

Robert Shiller created a P/E ratio evaluation model based on the teachings and ideas of Benjamin Graham, and his model shows that today's market valuations are near historic highs. In fact, there have been only 3 other occasions when stocks were beyond these lofty valuations on the Shiller Index. We are now approaching the levels of 2007. Monies invested in January of 2007 had a negative 5-year return. We see similar results for monies invested at these levels as they occurred through the 2000s.

At current (snapshot) one-year PE ratios, the market is at 19.62, while the market median is 14.56, according to While there's no guarantee of low-to-modest returns in this environment, an investor might want to take notice and plan accordingly.

If you have a large-to-modest sum that you are looking to invest, you might want to listen to the suggestions of Mr. Graham and at least hold a 25% allocation to bonds (he suggested that percentage as a minimum at all times for most investors). My guess is that today, Mr. Graham would be suggesting the 50% stock to 50% bond portfolio, as was often his recommendation. I would guess that given the low yields of good bonds, he would not find anything attractive, and hence would default to that 50/50 split down the middle, with rebalancing providing the opportunity to take advantage of whatever works moving forward.

And once again, it comes back to one of Graham's most simple and prudent ideas - dollar cost averaging. It may be the most simple and reliable of all investment strategies. When we buy on a regular schedule, we purchase more shares or units when stocks go on sale. Dollar cost averaging guarantees that we buy at or near the bottom - where the real money is made. From the commentary section of an edition of The Intelligent Investor,

if you had invested $12,000 in the S&P 500 at the beginning of September 1929, 10 years later you would have had only $7,223 left. But if you had started with a paltry $100 and simply invested another $100 every single month, then by August 1939, your money would have grown to $15,571.

Dollar cost averaging is the ultimate market timing device.

Another consideration for investors approaching their retirement date; it may be prudent to move 3, 4 or 5 years of retirement funding from stocks to cash. If you've selected wisely over the years, you would be selling high. If you are an indexer, you most certainly would be selling high, as the S&P 500 has delivered a 41.5% total return from January of 2013. For a Canadian investor, given the currency situation, that return for the S&P 500 is in the 50% area. Crazy stuff.

I would end with the admission that I have no idea what the markets will do over the coming months or years. There are periods where investors will continue to pay more, for less by way of earnings. But there are certainly times when the markets do announce "proceed with caution".

Happy investing, and be careful out there.

Disclosure: The author is long SPY, VIG, EWC, EFA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Dale Roberts is an investment funds associate at Tangerine Bank (formerly ING Direct). The Tangerine Investment Portfolios offer complete, low-fee index-based portfolios to Canadians. Dale's commentary does not constitute investment advice. The opinions and information should only be factored into an investor's overall opinion forming process