Stocks and Bonds in the long run

Stocks have been, are, and should remain one of the best long-term investments around.

Over the short term, however, other asset classes can outperform.

For instance, while stocks have languished, bonds have gone from strength to strength. In the late 1990s and early 2000s, annual returns for bonds have consistently outdistanced stocks in the double digits.

To be sure, it is not a question of either stocks or bonds. Both belong in investors’ portfolios. But bonds usually do not have the upper hand. Indeed, stocks deliver double-digit returns twice as often as bonds.

Since 1926, bonds have posted annual total returns of ten percent or more about a fourth of the time. But stocks have done so more than half the time.

Significantly, both stocks and bonds have about the same number of down years, although they are rarely down at the same time.

Investors can turn that disconnect between stocks and bonds to their advantage through asset allocation. By spreading their assets across a variety of different classes and styles, investors can help ensure that they participate in the upturns and better manage losses in the downturns.

Turning points in the cycle make it a challenge to stick to asset allocation plans, but that is exactly when it is most important. History is peppered with episodes of one asset class outperforming another.

But sooner or later, even the longest runs come to an end. In the 1990s, stocks had a remarkable run and the giddy headlines made it seem that the longest bull market on record would go on forever.

Today, the headlines can seem equally dark about stocks ever staging a sustained comeback. Those kinds of extremes in sentiment often herald a major change.