Hot or Not

Bonds continue to be unpopular among professional investors.  Over the past year, many well-known investors including John Paulson and Warren Buffet have expressed their preference for stocks over bonds. It’s easy to understand why. The current 2.45% yield on a 30 year Treasury is not only historically low but is practically negative when adjusted for inflation.  At least stocks have the potential to outpace inflation through earnings growth.  However, the reality is that stocks have gone nowhere over the past year.  Meanwhile, long-term Treasuries returned more than 36%.  Figure 1 shows the relative performance of US stocks (SPY) versus long-term Treasuries (TLO) from 7/25/2011 to 7/24/2012.

Figure 1
Source: Yahoo Finance, BCM

Treasuries were not only the best performing asset class of 2011, but they continue to be one of the strongest performers over the past year.  This all happened while Treasuries were widely unfavored by some of the smartest investors in the world. Even Bill Gross, nicknamed “the bond king,” warned investors to steer clear of Treasuries last year.  That’s why it’s so important to adhere to a disciplined asset allocation strategy, instead of repeatedly buying or selling what’s hot or not.  At the end of the day, no one really knows what the markets will do.  Markets will be markets – perfectly efficient sometimes, totally irrational at other times, and almost always unpredictable.

Victor K. Lai, CFA

This blog is for informational purposes only. Nothing on this blog constitutes investment, tax, or legal advice. You should conduct proper due diligence and / or consult with professional advisers before taking any investment action.