Saturday, October 4, 2008

Long Bonds, Short Equities

We've looked at this in the past with our post Where's the Equity Premium?, but worth noting again. Over the past 11 3/4 years, equities have underperformed bonds in the U.S. (comparing the S&P 500 with the Lehman Brothers Aggregate Bond Index INCLUDING REINVESTED DIVIDENDS / COUPONS).

Unfortunately it is even worse from an investment point of view. Investors typically don't buy once and hold, rather they continually invest. Assuming an investor had invested $1 per month in either stocks or bonds, they would have an identical return over the past 16 YEARS!

With the earnings component of equities under pressure and the relative cheapness of U.S. Bonds, look for bonds to continue their recent outperformance in the months / years to come.


  1. Interesting but have you included the return of compound dividends in this? It makes a big difference over 16 years. The Lehman index includes compounded interest.

  2. It does include dividend reinvestment (i.e. it is NOT just the S&P 500).

  3. fantastic! great blog by the way...