Equities vs. Bonds: A Century-Long Battle

Equities Have Outperformed Bonds Over 100 Years
When we look at market data over the last century, one thing becomes very clear—equities have massively outperformed bonds. A fascinating chart by Meb Faber shows that after adjusting for inflation, $1 invested in equities in 1924 has grown to $488 today. On the other hand, the same $1 invested in bonds has practically gone to zero. This means that while stocks have built long-term wealth, bonds have struggled to keep up, especially after considering inflation and taxes.

Interest Rate Cycles and Bond Performance
Bond returns have always been closely linked to interest rate cycles. From the 1920s to the 1970s, there was a rising interest rate environment, which caused bond prices to fall. Then, from the 1970s until recently, interest rates were falling, leading to rising bond prices. This cycle helped bonds generate returns over the last few decades. However, now that interest rates are no longer on a continuous downward trend, bonds have lost their edge. The last decade has been particularly bad for bond investors, making many question their role in a portfolio.

The 60-40 Portfolio Model Is Being Challenged
For decades, financial advisors have suggested the 60-40 portfolio model—60% in equities and 40% in bonds—as a balanced approach to investing. This strategy worked well when bond prices were rising due to falling interest rates. But if we are entering a period where interest rates stay high or even continue rising, bonds will likely continue to deliver poor returns. This means that the traditional 60-40 approach may not work as effectively in the future. Investors need to rethink how they allocate their portfolios.

Bonds Are No Longer a Hedge Against Stocks
One of the main reasons people invest in bonds is to balance the risk of equities. The idea was that when stocks fall, bonds would rise, offering some protection. However, in recent years, bonds have failed to provide this hedge. When stocks fell, bonds did not rise significantly, leaving investors with little protection. If bonds are not offering meaningful returns and are also failing as a hedge, their role in a portfolio becomes questionable.

Cash and Fixed Income May Not Be Safe Either
Many investors feel safe putting their money in banks or fixed deposits. However, after adjusting for inflation, these investments often provide little to no real returns. Inflation quietly erodes the purchasing power of money sitting in a bank account. If bond investing is becoming unattractive and fixed deposits do not provide real returns, investors need to explore better alternatives for wealth preservation and growth.

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