STRS ASSET ALLOCATION: Stocks v Bonds

Part II: WALL STREET REBUTTAL

From Mario Iacone, June 6, 2009

Bonds have outperformed Stocks in the last 40 Years. Use GOOGLE, type Rob Arnott to read and view all the discussion.

STRS MEMBERS should urge STRS Investment Department to research and consider increasing their percentage of Treasury and government bond assets as one means of reducing the effect of huge short term stock market losses on our pension fund.

Reference the previous post where research developed the following conclusion.

'for 10 years, 20 years, even 40 years, ordinary long-term Treasury bonds have outpaced the broad stock market.'

and later:

Wall Street pundits have not denied the accuracy of the research, but have pronounced several rebuttals.

REBUTTAL ONE: The fact that Bonds outperformed Stocks in the LAST 40 years does not mean that they will do so in the NEXT 40 years. True, but the same logic can be applied the other way. What guarantee is there that stocks will outperform bonds in the next 40 years?

REBUTTAL TWO: Economic factors over the last 10, 20, 40 years were ideal for bonds. One of the pundits states that it is mathematically improbable for those conditions to repeat over the next 10, 20, 40 years. However, those same economic factors also allowed the DOW to reach an all time high of 14,000.

IMPORTANT CONSIDERATION:

Stocks GO DOWN in cycles and if those cycles are not managed effectively to limit losses and protect profits, sizable gains are reduced and/or erased and as in the case of STRS, heavy losses are incurred.