Which was better over the last 10 years: US Stocks Or Short Term Bonds? And Why?

March 15, 2010 - PRLog -- In the month of February ETFM saw all of our investing strategies increase, as did the US stock market. In fact, it was the best February for the S&P 500 since 1998. Additionally we saw the US dollar go up, again this month, around .81%. The US dollar is continuing to march forward with its rally which started around Thanksgiving. Gold also had a very nice month posting a 3.27% gain. Commodities were up 4.14% for February. So even with the US dollar going up in February, based on the rise in the price of commodities, I would classify February 2010 as an inflationary type month.

From 1999 through 2009, 11 years, the stocks of the S&P 500 index outperformed Vanguard’s short term bond index fund in 6 of those years. The S&P 500 stocks outperformed this short term bond fund index by the following percent in these years:
• 1999 – 18%
• 2003 – 25%
• 2004 – 9%
• 2005 - 3.5%
• 2006 – 11%
• 2009 – 22%

So which investment do you think had a better 10 year compound annualized rate of return?

Clearly it looks as though it would be the stocks of the S&P 500, right? Wrong. Over the last 10 years, ending 12/31/2009, the compound annualized rate of return for the S&P 500 was about -1%. During the same time, the Vanguard Short Term Bond Index fund (VBISX) had a compound annualized rate of return of 5.09%. How can this be? I left out the most important fact of all: this short term bond index fund did not have even 1 losing year. During the years of 2002 and 2008 this short term bond index fund outperformed the S&P 500 by 30% and 42% respectively. So, because the S&P 500 had 2 years (out of the 10) where it went down dramatically, the turtle (or short term bonds) were easily able to win the race. The same thing happened to US stocks from 1966-1982 because of the big losses incurred during 1973 and 1974.

The importance of avoiding big losses, when investing, cannot be overstated or mentioned too often. How does an investor avoid big losses to their portfolio or money in a given year? I believe the answer is to truly diversify and actively manage the positions. Don’t get married to any one asset class. If stocks start to go down then get out. If stocks are going up then let your profits continue to ride. Not only that, diversify into other asset classes and use the same philosophy of cutting losses short and letting gains continue until a slow down or reversal is evident, with these assets as well.

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Eleven Two Fund Management is a Registered Investment Advisor (RIA) located in Marietta, GA. We are proud to be working with Christian Individuals, small business owners, and Families in over 16 states.