Golden Eagle often questions whether bonds should have a prominent place in a portfolio. We continue to reiterate that stocks are still the best bet to beat inflation. Bonds always get killed in response to periods rising interest rates. On the opposite hand, stocks do not always go down during periods of rising rates. Stocks represent the only capital asset that has proven to be a hedge against inflation.
Stocks are the best bet when it comes to wealth creation when compared to bonds. Since 1926, the normalized 10.3% annual return for stocks has significantly outdistanced the 4.8% annual return for bonds as well as the increase in the price level as measured by the Consumer Price Index (CPI).*
Now, let’s look at the worst period of secular inflation in the United States. During the worst period of secular inflation in the U.S. during 1940-1980, the C.P.I. ballooned from 1% to 13.5% where rates on long bonds jumped from 2.2% to 14.8%. The table to the right delineates the penalty from owning bonds during this period. There are several takeaways:
1. Stocks are a true hedge against inflation
2. Risk goes away with time. The S&P 500 went through a severe bear market in 2008 with a loss of 37%; it took just four years to recoup this loss.
3. Bonds suffer badly during periods of high inflation. Real capital was eroded by one-third during the 40-year period. This penalty was even greater if bonds were held in a taxable account.
Finally, stocks as measured by the S&P 500 have produced positive returns in 98% of all ten-year periods since 1936 and 100% over rolling eleven-year periods.
Let’s now take a look at how stocks and bonds performed in the face of rising inflation over the past five years.
Once again, stocks win out over bonds. Also note that stocks proved to be a hedge against inflation whereas bond values were more seriously eroded when taking inflation into account.
*Golden Eagle Strategies Research
Golden Eagle often questions whether bonds should have a prominent place in a portfolio. We continue to reiterate that stocks are still the best bet to beat inflation. Bonds always get killed in response to periods rising interest rates. On the opposite hand, stocks do not always go down during periods of rising rates. Stocks represent the only capital asset that has proven to be a hedge against inflation.
Stocks are the best bet when it comes to wealth creation when compared to bonds. Since 1926, the normalized 10.3% annual return for stocks has significantly outdistanced the 4.8% annual return for bonds as well as the increase in the price level as measured by the Consumer Price Index (CPI).*
Now, let’s look at the worst period of secular inflation in the United States. During the worst period of secular inflation in the U.S. during 1940-1980, the C.P.I. ballooned from 1% to 13.5% where rates on long bonds jumped from 2.2% to 14.8%. The table to the right delineates the penalty from owning bonds during this period. There are several takeaways:
1. Stocks are a true hedge against inflation
2. Risk goes away with time. The S&P 500 went through a severe bear market in 2008 with a loss of 37%; it took just four years to recoup this loss.
3. Bonds suffer badly during periods of high inflation. Real capital was eroded by one-third during the 40-year period. This penalty was even greater if bonds were held in a taxable account.
Finally, stocks as measured by the S&P 500 have produced positive returns in 98% of all ten-year periods since 1936 and 100% over rolling eleven-year periods.
Let’s now take a look at how stocks and bonds performed in the face of rising inflation over the past five years.
Once again, stocks win out over bonds. Also note that stocks proved to be a hedge against inflation whereas bond values were more seriously eroded when taking inflation into account.
*Golden Eagle Strategies Research
Manager of the Golden Eagle Growth Strategy
