I just took a glance at data for 10 years ending july 31,2010. Given the stampede of investors to bonds and the prevailing sentiment that stock investing doesn't work it may merit paying to attention to these numbers. After all the conventional wisdom is that it has been a "lost decade" for investors. Clearly that is not the case for investors with a globally diversified portfolio balanced between stocks and bonds.
Returns for some major indices 10 years through July 31, 2010
S+P 500 -1.81%
US Small Value Stocks (russell 2000 value) 6.56%
International Developed Markets 1.53%
Emerging Market Stocks 11.53%
Inflation Protected Bonds 7.49%
Aggregate US Bond Index 6.47%
3 Month TBills 2.60%
Given that US long term interest rates are near record lows it is a mathematical impossibility that future returns on bonds will match those of the past decades. 10 Year treasury rates have fallen from 6 % to their current level of 2.63% (see chart above ) creating the large capital gains on bonds (yields down = price up). Clearly we will not get a repeat of interest rate declines of 3.4%- interest rates on ten year bonds won't go negative.Neither would I see a hgh likelihood of long term interest rates declining by over 50% again although of course anything is possible.
Certainly given the rush of bond issuance by corporations, corporate treasurers see the low rates as a great borrowing opportunity even as indivdual investors see it as a great time to lend to money to them (by buying bonds ) at rock bottom rates. And of course a low cost of capital flows through to help corporate earnings.
So while I would be loathe to forecast future returns on stocks and bonds it seems quite questionable to argue that the massive move from stocks to bonds by individual investors is a prudent move.
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