This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Diversify Beyond Stocks, Bonds, Pimco Says

NEW YORK ( TheStreet) -- Robert Arnott, manager of the Pimco All Asset Fund (PASAX), made waves in spring 2009 when the stock market was hitting bottom. He noted that bonds had outperformed stocks during the previous 40 years. Investors should be wary about relying heavily on stocks, he said.

Critics dismissed Arnott, saying the poor showing of stocks was a fluke. But Arnott is sticking to his guns. Speaking at the recent Morningstar Investment Conference, he retraced market history and argued that stocks could fare poorly in the coming decades. "The idea that stocks beat bonds by 5% per year is simply not true," he said.

Most investors have expected stocks to outdo bonds over long periods. Confidence in stocks has been based on the famous data generated by Ibbotson Associates. During the period from 1926 through 2009, large stocks returned 9.8% annually, while intermediate government bonds returned 5.3%, according to Ibbotson.

Arnott bases his pessimistic view on market history going back 200 years. During that time, stocks have outpaced bonds by about 2.5% annually, he said. But there were very long periods when stocks lagged bonds. "If you bought stocks in 1803, you would be behind bonds for the next 68 years," he said.

In recent years, there have been many periods when bonds kept pace with stocks. Since 1968, stocks and bonds have produced similar returns, Arnott said. While stocks have generally risen over the past two centuries, there have been many 10-year periods when equities stagnated.

How will investors fare in the next decade? Arnott says both stocks and bonds will likely produce subpar results because the current yields are low, an indication that prices are rich.

Bonds yield 4%, so investors should expect to get annual returns of around 4%, Arnott said. Stocks may not do better. He said stocks began the 1990s with a dividend yield of 6%, a sign of reasonable valuation. But when share prices rise, dividend yields fall. As the greatest bull market in history unfolded, dividend yields dropped, reaching a meager 1% in 2000. At that point, dividend yields were at all-time lows and price-to-earnings ratios were at record highs. With stocks expensive, it was not surprising that the S&P 500 languished in the past decade.
1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $94.23 -0.80%
FB $100.86 1.30%
GOOG $684.13 0.89%
TSLA $142.94 -3.60%
YHOO $27.08 0.97%


Chart of I:DJI
DOW 15,904.98 -109.40 -0.68%
S&P 500 1,859.57 +7.36 0.40%
NASDAQ 4,306.9410 +38.1780 0.89%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs