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Stocks or Bonds for the Next 30 Years?

Stocks for the long term, eh? How long a term? Ten years? Well, that hasn't been so good. How about thirty years? Sorry, dear reader, but that hasn't worked lately, either.

The blaring Bloomberg headline earlier this week read, "Bonds Beat Stocks Over 30 Years for First Time Since 1861."

Ouch. Is that check and mate for the "long term" stock investors?

How did this happen?
Quite simply, 1981 was a great time to be an investor. It might not have seemed like it at the time -- interest rates were through the roof, inflation was screaming, there was general economic uncertainty -- but in retrospect, this is when you wanted to be pouring money into the market.

Interest rates may have crimped consumers at the time, but long-term bond yields were sky high, which also means that prices were low. At the same time, all of the skittishness caused investors to push valuations down in the stock market as well.

In short, if you were a buyer in 1981, kudos to you because you've done quite well whether you were buying stocks or bonds.

With both bond and stock yields (stock yield being earnings divided by price) crazy high back then, prices were low and poised to start rising. Ever since, we've seen a long stretch of rising prices for both stocks and bonds, while the yields for both have been in a race for the bottom. It's a race that bonds have been winning lately.

Sources: and author's calculations. S&P 500 earnings yield = inverse of 10-year price-to-earnings ratio.

What happens next?
I'd love to say that something great is in store for investors, but it's tough to be quite that optimistic. With yields beaten down to a pulp, investors can either invest to collect those unattractive yields or they can get fed up, pull their money out, and let prices fall until yields are back at attractive levels.

That is, of course, oversimplifying the story, but we saw basically that scenario during the 30 years leading up to 1981.

Sources: and author's calculations. S&P 500 earnings yield = inverse of 10-year price-to-earnings ratio.

It's worth noting that while rising yields meant lower prices for both assets, the fact that bonds started the period with a much lower yield meant that those investors had a much tougher time than the stock investors who were getting more attractive prices in the early '50s.

However, taking this all into consideration, I couldn't give a hoot who beat what over the past 30 years. What really concerns me is with prices high (and yields low) for both stocks and bonds right now, how the heck am I going to score decent returns over the next 30 years?

Sticking with stocks
Let me first say that I do have some of my retirement account invested in bonds -- across government, corporates, and high yield. I'm not quite so bold as to completely eschew diversification.

However, over the next 30 years I'm far more positive about stocks than I am about bonds. This is for two primary reasons.

  1. Current yield. Whether you're looking at a one-year earnings yield, a 10-year, or something in between, the yield on stocks is a heck of a lot more than what you can get from bonds right now.
  2. Earnings growth. If you invest $1,000 in a vanilla 10-year Treasury bond today with a 2% yield, you'll get $20 per year for your investment over the next year. The year after that? $20. Five years from now? $20. However, if you invest that same $1,000 in a stock, there is the possibility that the earnings attributable to your shares will grow.

Combine those two points and I find it extremely hard to get excited about bonds at all.

Zeroing in
Of course even though I feel very comfortable saying that stocks are the better bet than bonds right now, there's still the issue that the yield on stocks overall really isn't all that attractive on a historical or absolute basis.

Sources: and author's calculations. S&P 500 earnings yield = inverse of 10-year price-to-earnings ratio.

That's a bummer. However, it's a broad market, and not every stock is priced the same. For roughly a decade now, small- and mid-cap stocks have been beating the pants off larger cap stocks. It's been a painful stretch for anybody that owned large caps, but it's meant that, today, many of the biggest, highest-quality, most well-known companies out there are trading at the most attractive valuations.

The overall S&P 500's earnings yield based on 10-year average earnings is 5.2%. But General Electric's (NYSE: GE  ) yield based on the same metric is 9.5%. Oil giant ExxonMobil's (NYSE: XOM  ) is 8.4%. And 3M (NYSE: MMM  ) , Wells Fargo (NYSE: WFC  ) , and The Home Depot (NYSE: HD  ) all also have yields of 6% or better.

And lest we quickly forget, those yields absolutely clobber the 2% that you can currently get from a 10-year Treasury.

Of course, if we bring bonds back into the picture, we could toss earnings yields right out the window because the dividend yields on four of the five stocks above are above the 10-year Treasury rate. And if none of those stocks do it for you, every one of the stocks in The Motley Fool's special report "Secure Your Future With 11 Rock-Solid Dividend Stocks" has a dividend yield better than 10-year Treasuries -- some two or three times that. You can get your hands on a free copy of that report by clicking here.

The Motley Fool owns shares of Wells Fargo. Motley Fool newsletter services have recommended buying shares of 3M and The Home Depot, as well as creating a diagonal call position in 3M. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of 3M, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (21) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2011, at 5:27 PM, VolkOseba wrote:

    Depends partially on what happens next November...

  • Report this Comment On November 04, 2011, at 8:44 PM, bluebare wrote:

    Gold has outperformed both these assets in the past ten years. Just sayin'.

  • Report this Comment On November 04, 2011, at 11:58 PM, Merton123 wrote:

    Excellent articles - makes a good argument about picking and choosing individual investments versus a broad market. There is nothing additional that I can add.

  • Report this Comment On November 05, 2011, at 2:06 AM, JayWright wrote:

    I never understood the Stocks vs. Bonds battle. Why not own both?? I do and I'm doing great with them.

  • Report this Comment On November 05, 2011, at 5:37 AM, KurtEng wrote:

    I'm about 75% stocks and 25% bonds right now, so I'm betting on stocks for the future. It is really nice to get the monthly income that comes from most bond funds, though. I use that to invest in bonds or stocks to try to maintain the 75% mix.

  • Report this Comment On November 05, 2011, at 1:49 PM, daveandrae wrote:

    For several reasons, articles like these are largely academic.

    1. As of this writing, the average holding period for a stock listed on the NYSE is a whopping seven months.


    2. More than 50% of the actively managed stock mutual funds that were available for investment thirty years ago no longer EXIST!

    Think about that.

    Not only did these actively managed funds fail to "outperform" the market, but sometime between then and now, more than half of these actively managed funds have quite literally gone out of business!

    3. Since 1981, the s&p 500 has generated an annualized rate of return of around 8%. Over that same time period, the equity INVESTOR has generated a return of approximately 2.6%. Thus it doesn't matter what "the market" did. Most people, which you now know INCLUDES professional money managers, did far, far, worse.

    4. Thirty years ago I was 15 years old living at home with my parents. Thirty days ago, I bought some Dow Chemical stock at roughly book value. The earnings yield at that time was 11.22%. The dividend yield was 4.59%. Since then, the stock has appreciated by 29.56%.

    Now I don't know what the market looked like 30 years ago, but to suggest that an intelligent investor could not, or did not, find a single stock that outperformed bonds over the next thirty years sounds rather silly.

  • Report this Comment On November 05, 2011, at 2:58 PM, jm7700229 wrote:

    I guess the reason not to own both is that bonds suck. I can tolerate a low return for a few years, but when the returns go up, my capital goes down. That I don't like. I'm five years into retirement and I have almost no long term bond holdings. I'd just as soon hold cash. And I do.

    After decades of watching my stock picks outperform my mutual funds in good times and bad, I finally gave up on mutual funds. They tend to follow the markets too closely, regardless of their investment strategies. I'd rather out-perform the market, and I have. Not by genius but by common sense. Like not following the Motley Fool's advice to buy an overpriced NetFlix. NFLX has no sustainable competitive advantage. They did have great customer loyalty until the CEO, who is much admired by the Fools, stuck his foot in it. That is the downside of buying an overpriced stock. And of following the herd. And that's what I mean by common sense.

  • Report this Comment On November 05, 2011, at 3:12 PM, ershler wrote:


    It is odd you pick a 10 year span to evaluate gold instead of the 30 years they are talking about in the article. I'm just sayin'.

  • Report this Comment On November 05, 2011, at 6:16 PM, Bsorge10 wrote:

    Take a look at the average mutual fund stock and bond fund for the past 5 years. You will see that the stock funds were flat while the bond funds were up on average 4-5%. Only when you go back over the last 10 years do stocks excel. I think this is the reason that you need to have a mixture and make sure you get an ample amount of dividends in your portfolio.

  • Report this Comment On November 05, 2011, at 7:24 PM, jm7700229 wrote:

    Bsorge10, I agree but my point was that bonds are no longer returning anything that is worth the risk of rising rates. Bond funds have done well because the rates were dropping over that period. When they were paying a decent return, I owned them. When rates dropped and principal values soared, I liked that, too. But now rates are inadequate to waste my time on and have nowhere to go but up, reducing the principal value. When I see treasuries above 4% or so, I'll get some more.

  • Report this Comment On November 05, 2011, at 11:00 PM, TMFKopp wrote:


    It really is a sad state of affairs. But that's why I like writing for a Foolish audience that understands the importance of not treating your stocks like high-fashion clothes.


  • Report this Comment On November 05, 2011, at 11:03 PM, TMFKopp wrote:


    No, it's not odd. It's because over the past 30 years long-term government bonds have returned 11.5% per year. Stocks (as measured by the S&P 500) have returned 10.8% per year. Gold? 4.5% per year.

    No coincidence at all that the 10-year period was chosen.


  • Report this Comment On November 06, 2011, at 2:24 AM, TerryHogan wrote:

    I'd like to see exactly how the returns were calculated. I mean, you could have bought a 30-year bond in 1981 yielding 14%. Just sitting on that would have done you pretty well except for re-investing the coupons.

    Is this with dividends re-invested? And where are coupons re-invested? Are those per-year figures geometric or arithmetic averages?

    Also, '81 is the year with the highest interest rates, and this is the year with the lowest interest rates (barring last year) so it's kind of a perfect coincidence of events.

  • Report this Comment On November 06, 2011, at 7:06 AM, Thormole wrote:

    I'd like to see the inflation adjusted returns, since the value of the dollar has gone down since 1981. How did our purchasing power fare with bonds and stocks over this extended period?

  • Report this Comment On November 06, 2011, at 9:43 AM, daveandrae wrote:


    I don't have data going up to 2011, but from 1982-2001, The annualized rate of return for the s&p 500, adjusted for inflation was 10.5% vs. 8.5% for long term U.S. Government bonds.

    Again, this data is largely academic. For the s&p 500 INVESTOR return over that same time period was a whopping 2.6%.

    I began investing in June of 1998 when the s&p 500 was trading at 1133, have made every mistake in the book, and my portfolio has STILL grown at an annualized rate of 18.3% over the last thirteen and a half years.

    The more one tries to "correlate" investment performance, with Investor Return, the more one will realize that raw data, in and of itself, means nothing. It is statistical truth wrapped in a moral lie.

    In this business, that which is most important is not to "outperform" the market, which by the way, 75% of professional money managers fail to do. Rather, that which is most important is that one not disturb a position that is only going to be worth a great deal more later.

  • Report this Comment On November 06, 2011, at 11:13 AM, Merton123 wrote:

    The science of statistics is based on the belief that several samples pulled from a population will reflect the population average return. The professional mutual fund manager is trying to pull a nonrepresentative sample to get a return that is different from the population. To pull a nonrepresentative sample requires the following:

    sample size has to be small - the fewer companies stock purchased the better

    stock turnover has to be small - the higher the stock turnover the larger the sample size becomes.

    If a person wants to buy a mutual fund that will outperform the population - a global mutual fund is your best bet. The population is large so it is easier to pull a nonrepresentative sample. You also get the benefits of diversification which is nice if earnings growth doesn't go in the direction that you expect.

  • Report this Comment On November 06, 2011, at 8:26 PM, ouchtouch wrote:

    How about analyzing gold over the past 500 years. Let's see, down when real interest rates are high, up when real interest rates are low. What do we have today . . . hmm, negative real interest rates. I'll take gold until the Fed takes it's foot off the dollar's neck.

  • Report this Comment On November 07, 2011, at 2:03 AM, daveandrae wrote:


    True Story.

    I ran into a good friend of mine a couple of weeks ago. He told me about all of the gold he had been buying at $1660.00 an ounce. He bought the position by leveraging equity out of his house.

    His mouth was watering as he talked about taking $10-12,000 chunks of equity out of his home to buy more Gold.

    This is how tops begin to form. Not from the perspective of an asset class losing value, but rather from the toxic illusion that it never will.

  • Report this Comment On November 07, 2011, at 8:36 AM, pondee619 wrote:

    I remember 1981, talking with a friend about the markets. The question then was, "Do you really want to tie your money up for 30 years for 14%?" Mortgage rates were 16%+. Passbook savings accounts, with no minimum balance, were paying 7%. Look at the bond yield chart above. 1976= 7%+/- 1981= 14%. In five years the rate doubled. Did you REALLY want to tie up your money for 30 years for ONLY 14%? Hindsight is 20/20. Living at a time when bond yields double in five years is un-nerving. But, I guess, most of you would have to ask your moms and dads about that.

  • Report this Comment On November 10, 2011, at 9:15 AM, zaab55 wrote:

    Yes, I could kick myself, had we known. I had puchased a CD for 3 years in the early 80's. 12% interest something like that. When the rates dropped the bank offered me toasters, electric blankets you name it to get me to sell back the CD. Hindsight.

  • Report this Comment On November 10, 2011, at 9:17 AM, zaab55 wrote:

    If I recall I think I received a quilt for opening the original CD. Ahhh those were the days!

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