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Tuesday, May 1st, 2012
stocks and bonds

How have stocks done versus bonds?  Well, of course, it depends.

In the top panel, you see the relative performance of three bond ETFs versus the S&P 500, indexed to a value of 100 at the start.  You can see how the results differ if you’re looking at interest rate risk (via TLT) or primarily credit risk (via HYG) or a broader measure of the U.S. bond market (AGG).  All did better than the S&P.

The graph begins when HYG started trading, since it’s the youngest of the funds.  That happened to be just as there were some initial financial system wobbles before the full-fledged crisis of 2008-09.

The bottom panel shows the same information, but indexed to 12/31/08 instead.  Quite a different look to it, starting with the fact that the scales don’t match at all.  Oh, and the S&P comes out ahead.

There are lots of ways to look at bonds versus stocks — and many charts of the comparisons can be misleading.  As for all charts, remember that the starting point is the most important thing, that different scales from one chart to another can deceive, and that charts using two different axes within the same panel are often particularly misleading.

Along that line, watch out for charts that conflate price and yield.  Plus, make sure that total return is used for performance, given that income is critical to bond returns.  And, as the chart shows, “bonds” come in different flavors — just as “stocks” do.

Enough cautions and caveats?  The bottom line:  Be careful that the visual power of a chart doesn’t overwhelm your understanding of what it really displays.  (Chart:  Bloomberg terminal.)

new issue

The latest edition of The Prudent Fiduciary Digest is out, featuring links to pieces by Ashby Monk, who writes regular dispatches about and for institutional investors.  (If you want to be on the distribution list of this free newsletter or to see past issues, please visit the sign-up page.)