Bonds outperformed stocks over the last 10 years, so why invest in stocks?
Burton Malkiel, author of one of the best books ever on stock investing (A Random Walk Down Wall Street, now in its 10th edition), explains it well in the January 5th Wall St. Journal.
According to Malkiel:
- “If an investor buys a 10-year U.S. Treasury bond and holds it to maturity, he will make exactly 2%, the current yield to maturity. Even if the inflation rate is only 2%, the informal target of the Federal Reserve, investors will have earned a zero rate of return after inflation…With a higher inflation rate, U.S. Treasurys will be a sure loser.”
- “…long-run equity [stock] returns can be estimated by adding the anticipated 2012 dividend yield for the stock market to the long-run growth rate of earnings and dividends. The dividend yield of the U.S. market is about 2%. Over the long run, earnings and dividends have grown at 5% per year…Thus, with no change in valuation, U.S. stocks should produce returns of about 7%, five points higher than the yield on safe bonds.”
Past performance is no guarantee of future performance. Just because an investment performed well in the past doesn’t mean it well perform well in the future.
It also means that just because an investment performed poorly the past 10 years (stocks) doesn’t mean it will continue to perform poorly in the future.