Debunking Some Stock Investing “Axioms” – Part 2

Disclaimer: this blog is my personal opinion only. Information presented are accurate to the best of my knowledge. This blog does not provide any personal financial advice, or solication to buy/sell securities or financial services. I do not take any responsibility for any actions you take as a result of reading this blog.

The 4 almost universally accepted investing “axioms” from last post:
1. Stocks have returned 10% per year on average.
2. US/CAD stocks have never lost money over any 10 year period, so invest for long term and ignore the short term fluctuations. It’s time in the market not timing the market.
3. You must invest in stocks for growth so you will have enough money for retirement.
4. Stocks return is always higher than bond returns over the long term and investing long term will smooth out the volatility in equity.

Last time we examines point 1 and 2, let’s examine the remaining point 3 and 4.

Point 3 - You must invest in stocks for growth so you will have enough money for retirement. Well I wonder if this has anything to do with the fact that the MER on equity funds are anywhere from 0.5% (general market funds) to 1.5% or even 2% (specialty sector funds/foreign equity funds) higher than the MER on bond funds. The question you really need to ask yourself is how much do I really need to save for retirement and how much can I save? If you only need say $2M for retirement that’s 40 years down the road and you can save a large portion of your money every month, then do you really need to invest in equities hoping to get 10% per year? If you only need a 5% returns then why take the risk with equity when bonds and GIC can provider sufficient return? Why chase higher return with the risk of losing money when you can achieve your goal with certainty.

Point 4 - Stocks return is always higher than bond returns over the long term and investing long term will smooth out the volatility in equity. This point has been taken as pretty much the gospel/axiom/absolute truth in investing. Stock always returns more than bonds over the medium to long term. However that’s actually not true. Based on the Andex charts, the returns for S&P500 Total Return Index, US Long term bonds, TSX Total Return Index and Canadian Long term bonds are shown in the table below ending in year 2009:

Source – Andex Charts – Ending in 2009


Source - http://www.assetplay.net/financial-tools/rolling-returns.html



As you can see, while the 1980s and 1990s were characterized by large, unprecedented equity market return, the bond funds didn’t that badly relatively speaking. In 2000s, the bonds vastly outperformed the stock market. Taking the market crash of 08 into account, bonds has outperformed stocks over the last 10, 20, 30 years! Even the lowly T-Bills have outperformed the S&P 500 Total Return Index for 2000-2009. So much for the claim that stocks always outperform bonds over the long term!