Bonds outperformed stocks over the last 30 years

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CoderDude
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Bonds outperformed stocks over the last 30 years

Post by CoderDude » Thu Jan 05, 2012 4:47 pm

It was news to me that bonds have outperformed stocks over the last 30 years: http://www.usatoday.com/money/markets/s ... 52381380/1
  • Has this happened before?
  • If relative performance between bonds and stocks reverts to the mean, it seems like a really good time to shift allocation from bonds to stocks.
If I am investing money that is not needed for 20-30 years, it seems foolish to invest any of it in bonds. What am I missing?

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grap0013
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Re: Bonds outperformed stocks over the last 30 years

Post by grap0013 » Thu Jan 05, 2012 5:22 pm

You'll get some very intelligent people on here saying everyone needs some bonds. I disagree with this blanket statement. The average investor needs some bonds, but they are not for everyone. Odds are heavily in favor of equities crushing bonds over the next 30 years. If you have some knowledge of investment principles and discipline, stocks are the place to be if you need higher than 0% real return to achieve your financial goals.
There are no guarantees, only probabilities.

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Lies; damned lies; and statistics

Post by Taylor Larimore » Thu Jan 05, 2012 5:42 pm

Hi CoderDude:
It was news to me that bonds have outperformed stocks over the last 30 years:
It appears to me that statistics have been twisted to make a story. Here's a clue from the link in the story:
Given the rally in bonds in 2011, it might not be surprising that the Ibbotson Associates SBBI bonds index, a broad bond measure, returned 28% last year.
Vanguard's Total Bond Market Index Fund is a good representation of the U.S. bond market. Last year it returned 7.56%

Vanguard's "Pie Charts" make very clear that stocks have handily beaten bonds over the long term:

https://personal.vanguard.com/us/insigh ... llocations

Best wishes.
Taylor
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Re: Bonds outperformed stocks over the last 30 years

Post by magician » Thu Jan 05, 2012 5:58 pm

grap0013 wrote:Odds are heavily in favor of equities crushing bonds over the next 30 years.
Why's that? Have equities generally crushed bonds over a 30-year period?
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Re: Bonds outperformed stocks over the last 30 years

Post by DoWahDaddy » Thu Jan 05, 2012 6:04 pm

I have no issue with the article, nor with CoderDude's conclusion.
Me: 75/25 stocks/bonds | Son: 45/45/10 matchbox/hotwheels/thomas & friends

CoderDude
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Re: Lies; damned lies; and statistics

Post by CoderDude » Thu Jan 05, 2012 6:19 pm

Hi Taylor. Let me start by thanking you for your contributions to this forum over the years.
Taylor Larimore wrote: Vanguard's "Pie Charts" make very clear that stocks have handily beaten bonds over the long term
The fact that stocks have historically beaten bonds over the long term is precisely my point. If bonds have beaten stocks over the past 30 years (or even if they are close), it suggests that bonds have had a long run of overperformance, and stocks have had a long run of underperformance. Assuming that stock and bond returns will revert to the mean, it suggests bonds are due for a long period of underperformance, and stocks due for a long period of overperformance.

This is a very simple analysis and I would love to be proven wrong. Truthfully, I would not feel comfortable selling all my bonds and moving to 100% stocks. However, given their recent performance I don't see how bonds can continue to perform well compared to stocks over the next 30 years.

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Re: Bonds outperformed stocks over the last 30 years

Post by grap0013 » Thu Jan 05, 2012 6:29 pm

magician wrote:
grap0013 wrote:Odds are heavily in favor of equities crushing bonds over the next 30 years.
Why's that? Have equities generally crushed bonds over a 30-year period?
Well, let's assume over last 80 years average stock return 10% and bonds 5%. 5% spread annualized. Current 30 year treasury has a yield ~3%. Therefore, 30 year expected return is 3%. There is a correlation between starting market PE and 30 year return. The lower the starting PE, the higher the return. Currently the market PE is below its average. Low bond yields coupled with a "cheaper" than average stock market puts good odds on a 30 year return spread >5% annualized. I call that crushed.
There are no guarantees, only probabilities.

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Re: Bonds outperformed stocks over the last 30 years

Post by Clive » Thu Jan 05, 2012 8:05 pm

.....
Last edited by Clive on Fri Jan 06, 2012 3:20 pm, edited 1 time in total.

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Re: Bonds outperformed stocks over the last 30 years

Post by magician » Thu Jan 05, 2012 8:15 pm

grap0013 wrote:
magician wrote:
grap0013 wrote:Odds are heavily in favor of equities crushing bonds over the next 30 years.
Why's that? Have equities generally crushed bonds over a 30-year period?
Well, let's assume over last 80 years average stock return 10% and bonds 5%.
Is that reasonable to assume? (Or are we looking at historical data and computing instead of assuming?)
grap0013 wrote:Current 30 year treasury has a yield ~3%. Therefore, 30 year expected return is 3%.
Why use the 30-year Treasury for your expected return? Surely there are other bonds - corporates, for example - that will have higher yields. To compare risky stocks with risk-free bonds does seem to be skewing the data in favor of your argument, unreasonably, in my opinion.
grap0013 wrote:There is a correlation between starting market PE and 30 year return.
I assume you mean a strong, negative correlation.
grap0013 wrote:The lower the starting PE, the higher the return. Currently the market PE is below its average. Low bond yields coupled with a "cheaper" than average stock market puts good odds on a 30 year return spread >5% annualized. I call that crushed.
If all of your assumptions hold. I doubt that they will.

Let's agree to return here on January 5, 2042 to check it.

;)
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Re: Bonds outperformed stocks over the last 30 years

Post by nisiprius » Thu Jan 05, 2012 8:19 pm

CoderDude wrote:It was news to me that bonds have outperformed stocks over the last 30 years: http://www.usatoday.com/money/markets/s ... 52381380/1

Has this happened before?
Yes. In 2009. And maybe in 1871.

Robert Arnott's article, Bonds, Why Bother? contains this chart:
Image
It happened in 2009, and in fact at the low point of the stock market, bonds had beaten stocks over a 41-year period. They also beat stocks over the 68-year time span 1803-1871. The statistics from that time period are probably not reliable, but it's observable that stock cheerleaders treat nineteenth-century data as gospel when they are talking about how stable stock market returns have been, and ignore it when they are comparing stocks and bonds.

If the stock market doesn't get going pretty soon, we will probably see 30-year bonds-beat-stocks periods every time the stock market is low.

None of this is of any importance--I certainly wouldn't gamble on being lucky (or unlucky) enough to hit one of those periods. The only significance is that for years and years and years, stock cheerleaders would trot out the fact "stocks always beat bonds over any period of 30 years or more" as if the fact that it had never happened proved that it never could happen.

It doesn't prove bonds are good, it just proves that stocks are risky, and that a 30-year holding period does not make the risk go away.

The amazing thing is that people have continued to repeat the statement that stocks have always beaten bonds over every thirty-year period even after 2009 when it stopped being true.

William J. Bernstein has a good essay, Only Two Centuries, in which he accepts the validity of the nineteenth-century data, and says:
Modern investors tend to focus on the 20th century data, showing that stocks return almost 5% more per year than bonds, and ignore the more equivocal message of the 19th century. But it is not at all obvious that the older data are less relevant. Which do we believe? In the famous words of Paul Samuelson, "We have but one sample of history." And that sample contains only two centuries.
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Re: Bonds outperformed stocks over the last 30 years

Post by staythecourse » Thu Jan 05, 2012 8:34 pm

Okay I'll throw out my usual comment: Who cares?

If you believe bonds are going to beat stocks going are you going to go 100% bonds or if you think this is an aberration are you going ot shift 100% into stocks? I don't think so. So this information is nonactionable to the everyday investor. This type of thread is good for academic talk and that is it.

No individual investor is going to put all their eggs into one basket, i.e. bonds or stocks for the next 30 years no matter what data is presented. The reasonable investor will judge their allocation based on their willingness, ability, or need to take risk. Any other way to make the decision is purely active management via market timing. We all know how well that turns out.

Good luck.
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Re: Bonds outperformed stocks over the last 30 years

Post by Rob5TCP » Thu Jan 05, 2012 8:39 pm

A large part of the "surge" in bonds is because interest rates have been declining since the 1980's. Thirty years ago; you could get 14% on long term bonds. Now maybe 3%. So much of the returns have accrued from the lowering of bond rates and increasing price of the bonds. That is unlikely to repeat (actually can't repeat) for the next couple of decades. I have no idea of what the future holds, but bonds yields probably can only go to near zero. So, that allows only a few percentage points to go down and prices up (though I said this last year and look what happened).

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Re: Bonds outperformed stocks over the last 30 years

Post by richard » Thu Jan 05, 2012 8:43 pm

CoderDude wrote:If I am investing money that is not needed for 20-30 years, it seems foolish to invest any of it in bonds. What am I missing?
Stocks are expected to return more than bonds because they are riskier. If stocks are sure to beat bonds over 20-30 years, then they are not riskier and therefore would not be expected to generate a risk premium. The more confident investors are that stocks will beat bonds, the less likely it is that they will beat bonds.

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Re: Bonds outperformed stocks over the last 30 years

Post by joe8d » Thu Jan 05, 2012 8:45 pm

Rob5TCP wrote:A large part of the "surge" in bonds is because interest rates have been declining since the 1980's. Thirty years ago; you could get 14% on long term bonds. Now maybe 3%. So much of the returns have accrued from the lowering of bond rates and increasing price of the bonds. That is unlikely to repeat (actually can't repeat) for the next couple of decades. I have no idea of what the future holds, but bonds yields probably can only go to near zero. So, that allows only a few percentage points to go down and prices up (though I said this last year and look what happened).
Exactly.
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Re: Bonds outperformed stocks over the last 30 years

Post by nisiprius » Thu Jan 05, 2012 9:05 pm

staythecourse wrote:Okay I'll throw out my usual comment: Who cares?
I care, because the cheerleaders for stocks have for years, been spinning things with half-truths, exaggerated claims, or carefully qualified statements whose qualifications drop away with repetition. It is important to know that "stocks always beat bonds" just ain't so. It is important to know that it is not all that rare for things that "historically have never happened" to happen.

We accept the fact that new athletic records are set every year, yet in investing we are reluctant to regard historical extremes as being merely records that can be broken.
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Re: Bonds outperformed stocks over the last 30 years

Post by patrick » Thu Jan 05, 2012 9:05 pm

nisiprius wrote:
CoderDude wrote:It was news to me that bonds have outperformed stocks over the last 30 years: http://www.usatoday.com/money/markets/s ... 52381380/1

Has this happened before?
Yes. In 2009. And maybe in 1871.

Robert Arnott's article, Bonds, Why Bother?
I can't help but notice that something interesting happened almost immediately after the publication of this article -- the stock market surged by more than 50% while long term treasuries went down :D
nisiprius wrote:William J. Bernstein has a good essay, Only Two Centuries, in which he accepts the validity of the nineteenth-century data, and says:
Modern investors tend to focus on the 20th century data, showing that stocks return almost 5% more per year than bonds, and ignore the more equivocal message of the 19th century. But it is not at all obvious that the older data are less relevant. Which do we believe? In the famous words of Paul Samuelson, "We have but one sample of history." And that sample contains only two centuries.
If you are going to trust the 19th century data, remember that the difference isn't that stocks got better in the 20th century -- rather, bonds got worse.

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Re: Bonds outperformed stocks over the last 30 years

Post by Nathan Drake » Thu Jan 05, 2012 9:57 pm

Image

While it's interesting to look at a single data point and analyze performance decades later cumulatively, the reality is that over the course of one's career you will be investing your money gradually over the span of decades.

And while there are long spans of time for bond outperformance, the outperformance is usually minor, whereas the stock outperformance tends to be quite large when it does occur (and it appears to occur a lot more often than bond outperformance).

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Re: Bonds outperformed stocks over the last 30 years

Post by bob90245 » Thu Jan 05, 2012 10:08 pm

nisiprius wrote:
staythecourse wrote:Okay I'll throw out my usual comment: Who cares?
I care, because the cheerleaders for stocks have for years, been spinning things with half-truths, exaggerated claims, or carefully qualified statements whose qualifications drop away with repetition. It is important to know that "stocks always beat bonds" just ain't so. It is important to know that it is not all that rare for things that "historically have never happened" to happen.

We accept the fact that new athletic records are set every year, yet in investing we are reluctant to regard historical extremes as being merely records that can be broken.
Unfortunately, one has to recognize the unique circumstances why bonds are today basking in their "15 minutes of fame", so to speak. And these unique circumstances are unlikely to repeat, as Rob5TCP explained up thread. So read his post again if you missed it.

In the meantime, this chart should illustrate why bonds were so attractive 30 years ago. Click image for full size.

Image
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Re: Bonds outperformed stocks over the last 30 years

Post by Imperabo » Thu Jan 05, 2012 10:32 pm

It's dishonest to say that "bonds" beat stocks when you're only talking about a particular, fairly risky type of bonds. Long term US treasuries do not represent the entire bond market.

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Re: Bonds outperformed stocks over the last 30 years

Post by stratton » Thu Jan 05, 2012 11:32 pm

Why do I have a feeling a lot of people are going to look at the last 30 year bond bull market and extrapolate it over the next 30 years and get burned?!

That's going to be one heck of an "oops" in the future.

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Re: Bonds outperformed stocks over the last 30 years

Post by Bob's not my name » Fri Jan 06, 2012 7:01 am

nisiprius wrote:We accept the fact that new athletic records are set every year
I don't accept that. On an unrelated note, drug technology continues to advance.

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Re: Bonds outperformed stocks over the last 30 years

Post by rokidtoo » Fri Jan 06, 2012 7:23 am

Here's Roger Ibbotson's 2009 analysis of bonds vs. stocks for the long run. His conclusion is: "We believe the right strategy is to follow a disciplined asset allocation policy that considers the return and risk tradeoffs by taking advantage of the diversification benefits between stocks and bonds over time."

http://corporate.morningstar.com/ib/doc ... Stocks.pdf

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Re: Bonds outperformed stocks over the last 30 years

Post by nisiprius » Fri Jan 06, 2012 9:42 am

bob90245 wrote:[Unfortunately, one has to recognize the unique circumstances why bonds are today basking in their "15 minutes of fame", so to speak. And these unique circumstances are unlikely to repeat,
Before 2008-2009, it was common to treat the 1929 crash dismissively--like, "yeah, technically it happened, but it doesn't really count because it represented a set of unique circumstances that have a negligible chance of ever repeating." You were not encouraged to treat it as a real possibility in selecting your 401(k) contribution choices.

Look, I agree completely that it would be, let me say flatly, idiotic to throw in a big tilt toward bonds based on the trivia fact that "Bonds outperformed stocks over the last 30 years." I also agree fully with Imperato's comment "It's dishonest to say that 'bonds' beat stocks when you're only talking about a particular, fairly risky type of bonds. Long term US treasuries do not represent the entire bond market." (I'd note, however, that when the "bond bubble" crowd is knocking "bonds," they tend to be making dire predictions about long-term bonds, calling simply "bonds," and those predictions mysteriously are thought to encompass something like Vanguard Total Bond Market).

As for "unlikely to repeat," I still think it is very credible, if stocks don't take off soon (please, stocks, please?) that for the next few years, the fluctuations in the stock and bond market may produce a string of several precisely-cherry-picked endpoints over which "bonds beat stocks"--every time bonds are up or stocks are down. The circumstances that you say "are unlikely to repeat" have, in fact, already repeated once: in March 2009, and now again. Yes, it's nit-picking, but it illustrates the ease of saying inaccurate things.

After this cluster (or pair) of occurrences is over, the next time there's thirty-year period over which bonds beat stocks, yeah, it will probably be for some completely different, fresh, new set of unique circumstances, and stock boosters will say that one shouldn't count, either.

The reason why it's important to fuss about this freak occurrence is that if bonds never beat stocks, it would mean that everyone should be at 100% stocks, because you are certain to do better over the next thirty years. That's not a straw man. It is, for example, precisely what Peter Lynch said in 1995:
This brings me to an investment strategy I described in my second book, Beating the Street. If I convince you of its merits, you will never buy a bond or a bond fund, and you'll stay fully invested in stocks forever.
That's the same article in which he said the safe withdrawal rate for his strategy was 7%.

This sort of stuff is not harmless. And, when think about the risks of stocks, it is sensible to consider the main chance (almost all the variability-risk is on the upside, the question is how much they will beat bonds by), and also the "fat tails." Because when it is 2008-2009 and you are several sigmas out from the mean, suddenly you realize that ten-sigma events happen.
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Re: Bonds outperformed stocks over the last 30 years

Post by Verde » Fri Jan 06, 2012 9:46 am

How risky is a 30 year nominal bond portfolio held by a retiree drawing down 4% of initial portfolio + cola every year?
To me the only amazing thing here is that 30 year bonds have beaten the stock market so rarely over long periods, it should happen a lot more frequently.
Last edited by Verde on Fri Jan 06, 2012 9:52 am, edited 1 time in total.

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Re: Bonds outperformed stocks over the last 30 years

Post by dbr » Fri Jan 06, 2012 9:50 am

Verde wrote:How risky is a 30 year nominal bond portfolio held by a retiree drawing down 4% of initial portfolio + cola every year?
To me it the only amazing thing here is that 30 year bonds have beaten the stock market so rarely over long periods, it should happen a lot more frequently.
The historical answer is that such a project is very risky -- in fact doomed to fail more often than not.

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Re: Bonds outperformed stocks over the last 30 years

Post by greg24 » Fri Jan 06, 2012 10:15 am

Stocks aren't exactly poised to perform well. http://www.multpl.com/

Image

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Re: Bonds outperformed stocks over the last 30 years

Post by pkcrafter » Fri Jan 06, 2012 10:26 am

Are Bogleheads setting portfolio allocations based on historical performance or expected future performance? Either one is simply a bad idea. Stay with the fact that we don't know what is going to outperform. The smart investor will DIVERSIFY by holding both stocks and bonds.

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Re: Bonds outperformed stocks over the last 30 years

Post by Unormal » Fri Jan 06, 2012 10:38 am

greg24 wrote:Stocks aren't exactly poised to perform well. http://www.multpl.com/

Image
P/E is a useful metric, but the dividend yield is historically low. If the stocks aren't paying dividends, you might expect the price of the stock to be higher due to retained earnings, so even though it seems like we're only halfway down the secular trend, we may indeed simply be at a mirror point in the secular swings, but with far larger amounts of retained earnings.

http://www.gold-speculator.com/attachme ... 22405b.gif

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Re: Bonds outperformed stocks over the last 30 years

Post by richard » Fri Jan 06, 2012 10:57 am

Verde wrote:How risky is a 30 year nominal bond portfolio held by a retiree drawing down 4% of initial portfolio + cola every year?
To me the only amazing thing here is that 30 year bonds have beaten the stock market so rarely over long periods, it should happen a lot more frequently.
How many reliable independent 30 year data points do we have?

How many reliable independent 30 year data points do we have with a modern central bank?

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Re: Bonds outperformed stocks over the last 30 years

Post by richard » Fri Jan 06, 2012 11:04 am

Unormal wrote:P/E is a useful metric, but the dividend yield is historically low. If the stocks aren't paying dividends, you might expect the price of the stock to be higher due to retained earnings, so even though it seems like we're only halfway down the secular trend, we may indeed simply be at a mirror point in the secular swings, but with far larger amounts of retained earnings.
The Modigliani-Miller theorem is that capital structure (including dividend policy) is irrelevant for determining the value of a firm. They both won Noble prizes in economics.

While nothing is certain in this area, at a minimum it's far from clear that low dividends lead to higher stock prices.

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Re: Bonds outperformed stocks over the last 30 years

Post by jimkinny » Fri Jan 06, 2012 11:37 am

CoderDude wrote:It was news to me that bonds have outperformed stocks over the last 30 years: http://www.usatoday.com/money/markets/s ... 52381380/1
  • Has this happened before?
  • If relative performance between bonds and stocks reverts to the mean, it seems like a really good time to shift allocation from bonds to stocks.
If I am investing money that is not needed for 20-30 years, it seems foolish to invest any of it in bonds. What am I missing?
2 references. Find Grok's recent post regarding the number of years/periods of bonds performing better than equities.

Also, check out Risk Ferri's blog, linked below, regarding "years of pain before gains"

http://www.rickferri.com/blog/markets/e ... rket-gain/

Jim

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Re: Bonds outperformed stocks over the last 30 years

Post by magician » Fri Jan 06, 2012 12:16 pm

richard wrote:
Unormal wrote:P/E is a useful metric, but the dividend yield is historically low. If the stocks aren't paying dividends, you might expect the price of the stock to be higher due to retained earnings, so even though it seems like we're only halfway down the secular trend, we may indeed simply be at a mirror point in the secular swings, but with far larger amounts of retained earnings.
The Modigliani-Miller theorem is that capital structure (including dividend policy) is irrelevant for determining the value of a firm.
In its simplest formulation, without taxes and without the possibility of bankruptcy (hence, unlimited borrowing at a constant rate). If you include taxes and bankruptcy, then the capital structure is relevant in determining the value of a firm. M&M said as much.
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Re: Bonds outperformed stocks over the last 30 years

Post by richard » Fri Jan 06, 2012 12:40 pm

magician wrote:
richard wrote:
Unormal wrote:P/E is a useful metric, but the dividend yield is historically low. If the stocks aren't paying dividends, you might expect the price of the stock to be higher due to retained earnings, so even though it seems like we're only halfway down the secular trend, we may indeed simply be at a mirror point in the secular swings, but with far larger amounts of retained earnings.
The Modigliani-Miller theorem is that capital structure (including dividend policy) is irrelevant for determining the value of a firm.
In its simplest formulation, without taxes and without the possibility of bankruptcy (hence, unlimited borrowing at a constant rate). If you include taxes and bankruptcy, then the capital structure is relevant in determining the value of a firm. M&M said as much.
There's a fair amount out there that even with taxes and bankruptcy, dividend policy is irrelevant. For example, an investor can simulate higher dividends by selling shares, while higher debt may seem relevant due to tax deductibility, many companies achieve very low actual tax rates, bankruptcy risk from higher debt can counteract tax benefits, etc., etc.

Arnott and Asness wrote a paper about 10 years ago to the effect that low dividends result in lower stock prices.

The lack of certainty in this area is why I said in a part of the post you did not quote: "While nothing is certain in this area, at a minimum it's far from clear that low dividends lead to higher stock prices."

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Re: Bonds outperformed stocks over the last 30 years

Post by magician » Fri Jan 06, 2012 12:44 pm

richard wrote:
magician wrote:
richard wrote:
Unormal wrote:P/E is a useful metric, but the dividend yield is historically low. If the stocks aren't paying dividends, you might expect the price of the stock to be higher due to retained earnings, so even though it seems like we're only halfway down the secular trend, we may indeed simply be at a mirror point in the secular swings, but with far larger amounts of retained earnings.
The Modigliani-Miller theorem is that capital structure (including dividend policy) is irrelevant for determining the value of a firm.
In its simplest formulation, without taxes and without the possibility of bankruptcy (hence, unlimited borrowing at a constant rate). If you include taxes and bankruptcy, then the capital structure is relevant in determining the value of a firm. M&M said as much.
. . . an investor can simulate higher dividends by selling shares . . . .
Assuming that tax rates on dividends and capital gains are the same.
Simplify the complicated side; don't complify the simplicated side.

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Re: Bonds outperformed stocks over the last 30 years

Post by Unormal » Fri Jan 06, 2012 12:54 pm

richard wrote:
Unormal wrote:P/E is a useful metric, but the dividend yield is historically low. If the stocks aren't paying dividends, you might expect the price of the stock to be higher due to retained earnings, so even though it seems like we're only halfway down the secular trend, we may indeed simply be at a mirror point in the secular swings, but with far larger amounts of retained earnings.
The Modigliani-Miller theorem is that capital structure (including dividend policy) is irrelevant for determining the value of a firm. They both won Noble prizes in economics.

While nothing is certain in this area, at a minimum it's far from clear that low dividends lead to higher stock prices.
Sure I totally agree with that; I'm just saying that today's P/E ratio is set against a different backdrop than the previous part of the century. Dividends are just one piece of that backdrop. Simply looking at a P/E chart and waiting for it to reach previous secular lows may not work out; but maybe it will! :o

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Jay69
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Re: Bonds outperformed stocks over the last 30 years

Post by Jay69 » Fri Jan 06, 2012 1:48 pm

pkcrafter wrote:Are Bogleheads setting portfolio allocations based on historical performance or expected future performance? Either one is simply a bad idea. Stay with the fact that we don't know what is going to outperform. The smart investor will DIVERSIFY by holding both stocks and bonds.

Paul
I'm by no means and expert about any of this, thats why I'm here learning.

But...

If one does not base a portfolio allocation on some vision of past or expected future does that not say in the contex of this thread a 50/50 mix is about perfect for all over the long run. The more I read about this topic it may not be a bad plan.
"Out of clutter, find simplicity” Albert Einstein

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greg24
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Re: Bonds outperformed stocks over the last 30 years

Post by greg24 » Fri Jan 06, 2012 2:18 pm

Unormal wrote:
richard wrote:
Unormal wrote:P/E is a useful metric, but the dividend yield is historically low. If the stocks aren't paying dividends, you might expect the price of the stock to be higher due to retained earnings, so even though it seems like we're only halfway down the secular trend, we may indeed simply be at a mirror point in the secular swings, but with far larger amounts of retained earnings.
The Modigliani-Miller theorem is that capital structure (including dividend policy) is irrelevant for determining the value of a firm. They both won Noble prizes in economics.

While nothing is certain in this area, at a minimum it's far from clear that low dividends lead to higher stock prices.
Sure I totally agree with that; I'm just saying that today's P/E ratio is set against a different backdrop than the previous part of the century. Dividends are just one piece of that backdrop. Simply looking at a P/E chart and waiting for it to reach previous secular lows may not work out; but maybe it will! :o
I agree that we probably can't expect P/Es to reach previous secular lows. But I also can't look at current P/E levels and near historic dividend lows and think equities are guaranteed to smash bonds.

I'm sticking to my chosen asset allocation and controlling what is in my control.

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bob90245
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Re: Bonds outperformed stocks over the last 30 years

Post by bob90245 » Fri Jan 06, 2012 9:00 pm

nisiprius wrote:As for "unlikely to repeat," I still think it is very credible, if stocks don't take off soon (please, stocks, please?) that for the next few years, the fluctuations in the stock and bond market may produce a string of several precisely-cherry-picked endpoints over which "bonds beat stocks"--every time bonds are up or stocks are down. The circumstances that you say "are unlikely to repeat" have, in fact, already repeated once: in March 2009, and now again. Yes, it's nit-picking, but it illustrates the ease of saying inaccurate things.

After this cluster (or pair) of occurrences is over, the next time there's thirty-year period over which bonds beat stocks, yeah, it will probably be for some completely different, fresh, new set of unique circumstances, and stock boosters will say that one shouldn't count, either.

The reason why it's important to fuss about this freak occurrence is that if bonds never beat stocks, it would mean that everyone should be at 100% stocks, because you are certain to do better over the next thirty years. That's not a straw man. It is, for example, precisely what Peter Lynch said in 1995:
This brings me to an investment strategy I described in my second book, Beating the Street. If I convince you of its merits, you will never buy a bond or a bond fund, and you'll stay fully invested in stocks forever.
That's the same article in which he said the safe withdrawal rate for his strategy was 7%.

This sort of stuff is not harmless. And, when think about the risks of stocks, it is sensible to consider the main chance (almost all the variability-risk is on the upside, the question is how much they will beat bonds by), and also the "fat tails." Because when it is 2008-2009 and you are several sigmas out from the mean, suddenly you realize that ten-sigma events happen.
Pardon me for saying this, but I think your agitation is way out of proportion. Yes, we are in a cluster of endpoint years when bond yields were at historic highs 30 years ago. So these kinds of articles highlighting bonds beating stocks may continue for another "15 minutes of fame". :D

But don't make this to mean that I agree with your fear that people will think this to mean stocks have "no risk". Most people are still risk averse. And most are downright discouraged from a decade of almost no reward for holding stocks. In my opinion, we are a loooong way until investors again become fearless and think stocks have no risk.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

indian86
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Re: Lies; damned lies; and statistics

Post by indian86 » Fri Jan 06, 2012 9:30 pm

CoderDude wrote:Hi Taylor. Let me start by thanking you for your contributions to this forum over the years.
Taylor Larimore wrote: Vanguard's "Pie Charts" make very clear that stocks have handily beaten bonds over the long term
The fact that stocks have historically beaten bonds over the long term is precisely my point. If bonds have beaten stocks over the past 30 years (or even if they are close), it suggests that bonds have had a long run of overperformance, and stocks have had a long run of underperformance. Assuming that stock and bond returns will revert to the mean, it suggests bonds are due for a long period of underperformance, and stocks due for a long period of overperformance.

This is a very simple analysis and I would love to be proven wrong. Truthfully, I would not feel comfortable selling all my bonds and moving to 100% stocks. However, given their recent performance I don't see how bonds can continue to perform well compared to stocks over the next 30 years.
You can do anything you want with historical data. Bonds performed equal to stocks from the period of 1870 to 1940. It wasn't till after 1940 that stocks gained some outperformance. Now we have had 30 years for very good bond performance. So even though bonds have performed well for 30 years and using that to conclude that now it is stock's turn, is assuming that stocks will perform better. That is an unfounded assumption. All I know if everyone is saying don't buy bonds now and load up on stocks, and I am concerned that that view is too simple. Market is never that easy. I guess we should all buy TBT and sit back and collect our dough for the next 10 years. Hmmmmm.

Nathan Drake
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Re: Bonds outperformed stocks over the last 30 years

Post by Nathan Drake » Fri Jan 06, 2012 9:52 pm

Bonds performed equal to stocks from the period of 1870 to 1940. It wasn't till after 1940 that stocks gained some outperformance.
The graph in this very thread says otherwise.

From the period of 1870 to 1940, stocks had a huge outperformance.

grok87
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Re: Bonds outperformed stocks over the last 30 years

Post by grok87 » Fri Jan 06, 2012 9:59 pm

jimkinny wrote:
CoderDude wrote:It was news to me that bonds have outperformed stocks over the last 30 years: http://www.usatoday.com/money/markets/s ... 52381380/1
  • Has this happened before?
  • If relative performance between bonds and stocks reverts to the mean, it seems like a really good time to shift allocation from bonds to stocks.
If I am investing money that is not needed for 20-30 years, it seems foolish to invest any of it in bonds. What am I missing?
2 references. Find Grok's recent post regarding the number of years/periods of bonds performing better than equities.

Also, check out Risk Ferri's blog, linked below, regarding "years of pain before gains"

http://www.rickferri.com/blog/markets/e ... rket-gain/

Jim
see item 3
http://www.bogleheads.org/forum/viewtop ... 10&t=87293

also see good comments by rodc starting on december 21 in the thread, and subsequent discussion

cheers,
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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