Saturday, March 28, 2009

Stocks vs. Bonds: who wins?

In equilibrium, the risk premium that compensates investors for holding relatively risky stocks is about 2.5%. But, as the above graph of stock-bond returns shows, (from John Mauldin, Why Bother with Bonds), there are plenty of periods when bonds outperformed stocks. The period ending in 2008, is one such episode. Each of the horizontal lines denote periods where bonds outperformed stocks.

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