Bonds Are on a Roll — Is it Time to Give Up on Stocks?

A well-known academic argues against stocks, even for the long run. But it feels a bit like arguing that Warren Buffett doesn't know what he's doing. Whose side would you take?

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Nobody ever got rich betting against America. I’m not sure who said it first but this statement is often attributed to Warren Buffett. The central idea is that the U.S. economy is resilient and always recovers, which is worth considering when pundits and academics start trotting out theories about how stocks for the long run have become a poor choice.

But here is the highly regarded Zvi Bodie, economics author and professor of management at Boston University, and financial adviser Rachelle Taqqu, making just that argument. In The Wall Street Journal, they assert that “stocks are always a risky investment, and the longer you hold them, the better your chances of getting blindsided by a downturn.”

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That, of course, is true. But not owning stocks means missing their upside too, and even Bodie and Taqqu concede that stocks have beaten bonds over every 30-year period since Lincoln was president—except the most recent 30-year period, 1981 through 2011, when bonds returned 11.5% a year vs. 10.8% for stocks. Bonds are less volatile. But their lone period of outperformance over 150 years was a squeaker.

As you would expect, Bodie and Taqqu make great points. Not everyone has 30 years. In a downturn, much of your gains in the stock market can be stripped at the worst possible moment: the day you retire. Too many pre-retirees are overweight stocks in an effort to recover what they lost.

Underscoring that point is a recent AARP survey, which found that nearly half of folks past the age of 50 who are either working, looking for work, or who have recently left the labor force, believe their standard of living in retirement will be lower than the previous generation.

So be it, Bodie and Taqqu say. They advise that you plan for retirement with the assets you have now; not the assets you once had, planned to have, or wish you could build. I like that dose of reality. To meet monthly fixed costs, secure guaranteed inflation-adjusting income through I-Bonds and TIPS (in a tax-favored retirement account, if possible). Good choices those. But curiously, they make no mention of immediate and deferred fixed annuities. These are widely used income-generating insurance products that may soon be staples in employer-sponsored tax-favored retirement accounts.

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Bodie and Taqqu recommend funding “aspirational” goals like travel and entertainment with other investments, including stocks. But—and here’s where they start to lose me—they advise making sure your stocks are protected. You can own them through a mutual fund where the manager hedges against a decline, or hedge yourself through the options market. The reality is that stock funds that hedge often have high fees. Meanwhile, buying and selling put- and call-options yourself, while doable, seems a bit beyond most peoples’ bandwidth. Not only that, but to do it with zero costs you give up much more potential upside than you limit your downside.

My chief issue with their approach right now, though, is that we are so far along in this dead-money period for stocks that giving up on their long-term promise entirely seems like a mistake. You’d be betting against the resiliency of the U.S. economy, which has never made anyone rich. Warren Buffett said so.