Financial Analyst: Be Wary of the ‘Cult of Equities’

Financial Analyst: Be Wary of the ‘Cult of Equities’

There’s a firmly-ingrained notion among many investors that stocks outperform bonds over the long term by an average of 5 percent. This view isn’t based on reality but “myth.” At least that’s what contrarian financial analyst and money manager Robert D. Arnott, chairman of Research Affiliates says.

Arnott, who reviewed data going back to 1801, found that there are several long periods in which bonds outpace stocks: 1803-1871, 1929-1949, and 1968-February 2009.

The findings of Arnott’s research have just been published in the Journal of Indexes – and were previewed in an item by Lawrence C. Strauss in the March 30 issue of Barron’s. “We’ve had 30 to 40 years of building this cult of equities, where if your time horizon is long enough, it doesn’t matter what you pay for stocks,” Arnott told Barron’s. “That’s dangerous.”

For some baby boomers, Arnott’s findings might prove troubling. Because bonds outperformed stocks from 1968 to 2009, many of the baby boomers who relied on stock performance to provide for a good retirement have seen their nest eggs tumble along with the stock market.

But for some, it is already too late. The first group of baby boomers – those born in 1946 – turned 62 last year, and many chose to take early retirement.  These baby boomers have been the most affected by the recent stock market crash and may be disappointed with their retirement savings – unless stocks stage a dramatic recovery in the next few years.

Read the Washington Post’s analysis of Arnott’s study.   

Robert Stowe England is a financial writer and a consultant to the Pension Rights Center. An April 18, 2009 interview with Robert Arnott appears in his blog Mind over Market.