Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 1. BONDS The Better Investment

Watching your stocks all day long is amusing up to a point, but income is the thing if you're shopping for anything from pajamas to pastrami sandwiches.

—JOE MYSAK Bloomberg columnist^[4]

FOR GENERATIONS, STOCKS have gotten top billing over bonds. Stocks, many insist, have outperformed bonds in the past, will outperform bonds in the future, and are not risky if held for ten years or more. We believe these assertions are myths. This chapter makes the case that the stated historical return of 10 percent on stocks is merely theoretical because it does not take into account taxes, expenses, and investors' bad timing. It is uncertain that stocks will outperform bonds in the future, and the risk of a severe stock market decline increases as the investment period increases. Stocks are riskier and less predictable than bonds. Ultimately, they are not as good an investment as bonds.

In the holy name of diversification, investors are told to balance the bulk of their investment portfolio between stocks and bonds. We think that's a mistake. For individual investors, we believe that bonds are a better investment than stocks. Indeed, the ideal portfolio for individual investors would contain only plain-vanilla bonds. That's because after paying fees, expenses, taxes, and factorizing in the risk of bad timing, the return on stocks is not likely to exceed the return on bonds, particularly when the risks associated with stocks are taken into account. The bonds ...