Buy Stocks, Bonds Suck.

Bold predictions are nothing new on Wall Street. Every soothsayer, fortune teller, oracle, and expert has an opinion or three as to where the stock market is heading.

In 1991, Jack Vander Vliet, then head of Dean Witter’s Inter-Capital Division, made the bold prediction that the Dow Jones would reach 10,000 by 2000.[1]  It doesn’t seem like much of a forecast today with the Dow trading north of 24,000.  At the time, however, it was bold. The Dow Jones was trading at 2,736, a far cry from 10,000. For it to breach 10,000 it would have to average 15.5% per year. When he made the prediction, the 10-year average annual return for stocks had been 15.3%, so his forecast wasn’t farfetched.

I had the opportunity to hear Mr. Vander Vliet speak at investor workshops where his rallying cry was: “Buy stocks, bonds suck.” He was not a fan of bonds. As I mentioned, the 10-year average annual return for stocks was 15.3% while the return for bonds was 14.2%.[2] The two asset classes were performing extremely well, well above their historical returns. It was surprising, given their returns, that he hated bonds.

Since 1991 stocks have returned 10.3% per year, bonds 8.1%. Stocks did outperform bonds, but there is more to owning bonds than total return. One of the best reasons to own them is that they’re negatively correlated to stocks. During the Tech-Wreck (2000-2002) stocks fell 43% and bonds rose by the same amount, 43%. During the Great Recession (2007-2009) stocks fell 37% and bonds rose 26%.[3] An allocation to stocks and bonds gave you solid returns with less risk.

How did his prediction turnout? In April 1999 the Dow closed above 10,000 – 8 months ahead of schedule!  I would amend his rallying cry to read: “Buy stocks, bonds don’t suck, and they may help my portfolio through diversification and asset allocation!”

We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard. ~ JFK

July 19, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

[1] http://articles.mcall.com/1991-01-28/business/2788104_1_portfolio-managers-fund-manager-mutual-funds, Dan Shope, The Morning Call, 1/28/1991

[2] Dimensional Fund Advisors 2018 Matrix Book

[3] Ibid

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