The Rational Investor #004: John Bogle on the Role of Stocks and Bonds
Happy Saturday to you,
Welcome to the 4th edition of The Rational Investor Newsletter.
Today’s passage comes from John Bogle’s 2009 book, Common Sense on Mutual Funds. What’s great about the types of quotes that I share here is that while the data itself may be dated, the principles remain as true as ever. That’s certainly true for Bogle’s thoughts today.
As an FYI, this quote originally appears in just two paragraphs, so I chose to break up the text only to make it more readable here in this email. Aside from bolding certain sentences, no edits have been made to the quote itself.
Onto the main event…
Here’s John Bogle on the Role of Stocks and Bonds in Portfolios [Emphasis is Mine]:
The long-term risks and returns of stocks and bonds suggest the outlines of a commensense investment strategy for the long-term investor.
First, the long-term investor should make a significant commitment to stocks. Since 1802, and in each of the extended periods examined by Professor Siegel, stocks have earned higher returns than bonds, providing the best long-term opportunity for growth, as well as for protection against the threat of inflation.
The data make clear that, if risk is the chance of failing to earn a real return over the long term, bonds have carried a higher risk than stocks.
If you have faith that our economic garden is basically healthy and fertile, the best way to reap long-term rewards is to plant seeds with prospects for growth, as investing in common stocks clearly allows.
But you must also be well provisioned for the onset of unexpectedly cold winters, and that is where bonds play a vital role.
During the long sweep of U.S. history since 1802, the variability of stock returns has been greater than that of bonds. In the short-run, stocks are riskier than bonds.
Even in the longer run, stocks can—and do—underperform bonds. Indeed, in the 187 rolling 10-year periods since the establishment of our securities markets, bonds have outperformed stocks in 38 periods—one out of every five.
In still longer holding periods, however, the instances of bond market outperformance shrink to a statistical anomaly.
In the 172 rolling 25-year periods since 1802, bonds have outperformed stocks in eight periods—only one out of every 21.
While this is probably not new to you, most people overcomplicate this debate.
In my eyes, the easiest way to think about this is that you should own short-term assets (cash & bonds) for short-term goals and long-term assets (equities) for long-term goals. It doesn’t need to be any more complicated than that.
If you don’t have any short-term goals, do you need short-term assets? I don’t think so, but that’s up to you and/or your client to decide.
Full disclosure: In my family’s personal portfolio, we own 100% equities as we have no near-term goals and believe we can (and we have) behave appropriately through all sorts of market disruptions. This being the case, I believe it would be irrational to own anything other than equities because the ownership of those asset classes would, historically speaking, lower our long-term return which runs counter to achieving our long-term goals.
That said, to each their own.
Thanks for reading. I’ll be back again next week with more timeless wisdom from great investors.
Enjoy the weekend!
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