Question

1. Comment on the following statement: as an asset class stocks have generally outperformed both corporate and government bonds over the last several decades. Therefore, investors are wasting their money by holding securities other than stocks.

Answer 1

Stocks are assumed to beat the bonds in the long run. While there are no price guarantee for stocks, the bonds are safer. Stocks are considered to be riskier than bonds so the buyers expect more reward for suffering that risk. But as an asset class stocks have outperformed both corporate and government bonds over the last several decades. Stocks have outperformed the bonds over a several decades until 2000-2009 decade. From that decade, bonds started to outperform stocks. But this outperformance was only for a short period of time. When we consider the performance of securities over the past 100 years, bonds performed better than stocks only for shorter periods. Over longer periods, the stocks outperformed.

Stocks have more return potential compared to bonds. The greater volatility risk ensures more return to the stock holders. Therefore, investors are wasting their money by holding securities other than stocks. Investors should invest in stocks because from the history it is evident that it is the stock which perform well than the bonds.