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==Bonds Are Not for Long Term Investors==
Bonds? We Ain't Got No Stinkin' Bonds”
portfolio manager Fred C. Dobbs, The Treasure of the Sierra Madre
“Stocks hold the key to enriching....all people...”
J. Siegel, Stocks for the Long Run
Why the AMP Portfolio Holds No Bonds
Our goal is above-average returns. Above-average means consistently above the returns for fixed income securities. We will consistently beat the Standard and Poors Averages and the Dow Jones Industrial Average. We all live through history – and every long term investor is better off in the stock market than the bond market. If we can simply picture ourselves following in the steps the most successful investors, like Warren Buffett or Peter Lynch – we shall grow rich with superior stocks held for returns that are superior.
”All that we learn from history is that we cannot learn from history.”
In periods of short term volatility or outright recession you may wish you were only in bonds, but history shows that events like war, depression and earthquakes do not last forever – nor does the harm done to your portfolio. It is true that you would have to have the patience (and Courage) to stay in the stock market through the depression in order to profit from the post-war boom – but what is certain is that you will be richer in the market than out of the market. For this fact – the market pays you to be patient – we are not market timers. There are seasonal factors that effect returns. For example, it is better to be out of natural gas stocks in the “shoulder season” between the end of winter and the start of summer. However, we are always “in” stocks – it is impossible to sell all your portfolio at the bottom and then buy back in as the market turns. Studies show that being “out” of the market for even a few key weeks in a year returns your portfolio to mediocre from superior.
Inflation exaggerates how well you are doing. The outstanding returns following the end of the Second World War have to be adjusted. Jack Benny, on his radio show in the 1940's, complained of gasoline costing eighteen cents a gallon and in 1945 refused to buy a home in Palm Springs because he thought $70,000 was excessive. Today, it's likely you can't get a garage for that price. An accurate measurement, therefore, can be the purchasing value of your dollar – the value of money adjusted for inflation. Jack Benny could see the value of that Palm Springs home in today's asking price but those comparisons are not strictly in line with inflation. Realty prices reflect location to a greater extent than an inflation adjustment. A better measurement is how a dollar invested in the stock market compares with an equal amount invested in bonds, gold or left “uninvested” as cash. In each case, the stock market is far superior over time. The stock market returned 6.9% since 1926 to 2001. You can add an average inflation rate of 3% to arrive at a long term nominal return of about 10%.
Let's be practical. A lot can, and will, happen over the next forty years – but Siegel's statistics for ten and twenty year brackets show stocks as superior to bonds. We can be reasonably sure that we are all going to live longer than the next twelve months. My father lived to be 90 and, if I live as long, my investing time horizon is three decades. My children can project a life o investing for six more decades. Yet the average analyst forecast is the results over the next twelve months and, thus, investors are basing their selections on that short time frame. Don't limit your thinking to twelve months when you will be here thirty years from today. That view – thirty years instead of CNBC's view of the next thirty minutes – helps to limit the emotional waves of depression and excitement of day to day events and the damage that short term thinking inflicts on our planning.