The chorus of bullish stock-market pundits on CNBC has become deafening in recent months. The justification for buying stocks that I hear most often from this crowd is that stocks are cheap because bond yields are low. Many bulls will tell you that you should dump your bonds in favor of stocks because stock yields are higher than bond yields. This sounds like a compelling argument in favor of stocks. And based on the multiyear highs of recent investor-sentiment polls, many individual investors agree.
After being conditioned by inflated stock prices for two decades, loads of investors believe that stock yields are most often lower than bond yields. But did you know that for the first 60 years of the last century, stock yields were almost always greater than bond yields? Why would stocks yield more than bonds? Well, setting aside the fact that anybody valuing stocks on the basis of bond yields either has an ax to grind or a fundamental misunderstanding of proper asset valuation, a simple response would be that stocks are riskier than bonds. Stocks are more volatile and rank lower in the capital structure, and companies have no legal obligation to make payments to shareholders as they do to bondholders. Why shouldn’t stocks yield more than bonds?
With Treasury yields at multi-decade lows, the drumbeat of market pundits panning bonds and touting stocks will grow louder. Ignore it. Bonds offer the safety and diversification necessary to craft a properly diversified portfolio.
Latest posts by Dick Young (see all)
- Are You One of the Many Investors Wasting Your Time? - August 10, 2018
- Marry Compound Interest, Divorce Market Timing - August 3, 2018
- Investing with the Hard-Hitting NFL-style of Paul Brown - July 27, 2018