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Stocks Versus Bonds - Defining your Long Run

|Includes: AGG, DBC, iShares MSCI EAFE ETF (EFA), IWM, MDY, RSP, RWR, VTI
Stocks and Bonds 

Yes, of course stocks have higher returns than bonds in the long run. Over a lifetime, there is no question. Stockholders demand a higher return from the corporation in exchange for no claim on the assets if the company goes bankrupt. During a 100 year span, it is fairly certain that stocks will beat bonds by several percentage points.
 
While this is all true in the long run, what does it mean for the average person investing for retirement? Not much. Like we have seen in the past 10 years, and like Japan has seen for the last 30 years, stock markets can have poor returns for decades. When asked whether stocks or bonds would return more, Buffett replied "Who knows?" People say that stocks have to be better than bonds, but I've pointed out just the opposite: That all depends on the starting price."
 
From the investors's perspective, this means not to attach oneself to any particular dogma. Buy and hold may not be as good as advertised, but market timing is very hard. Treat your retirement as if your life depended on it with no option for bankruptcy, by contributing more to your retirement than you think you will need. Overinvest in your retirement, because you cannot count on adequate returns.
 
Remember that the combination of low interest rates and years of bond outperformance mean that fixed income should underperform in the future. Worried investors must understand that future returns may be lower than average. This means recognizing that stocks may return only 2-3% more than inflation over the next 20 years. Bonds may provide 0-1% real returns.
 
Investment Action Plan
What is your plan in case this happens? You need to max out your 401k to the best of your ability, and open an IRA. If you know nothing about investing, consider putting stocks at 50-60% of your portfolio with equal parts international (NYSEARCA:EFA) and domestic (NYSEARCA:VTI), and spreading out the funds among large (NYSEARCA:RSP), mid (NYSEARCA:MDY) and small caps (NYSEARCA:IWM). Put the rest in bonds (NYSEARCA:AGG) with a sprinkling of other asset classes, including real estate (NYSEARCA:RWR) and commodities (NYSEARCA:DBC).
 
Understand that a secure retirement means possibly giving up spending income now, and putting that money towards retirement. 30 years of leisure at the end of your life is not a God-given right, it is a privilege that must be earned through a lifetime of prudent action.