Investors face an unfamiliar predicament today; they have options.

For the past 10 years, the stock market motto was TINA (there is no alternative). Near-0% yields kept investors away from bonds; thus the only real chance of earning modest returns came from stocks.

Today, the 10-year treasury rate sits near 5% for the first time in a long time. Rising rates have cooled off stock and bond prices through August/September. The big question is:

Why own stocks when the economy is slowing down, and I can get a risk-free 5%?

It can be helpful to look towards history for how a scenario like this plays out. Check out this excerpt from a 1993 LA Times article I found:

This article was written 30 years ago when interest rates first *dropped* to 7%. Owning bonds was especially tempting, and even *practical*, at the time.

1993 was the pilot year for two of the biggest shows in the 90’s: “Frasier” and “The X Files”. Consider the investment options available to Dr. Frasier Crane and Agent Fox Mulder at the time.

Assume they both wanted to invest $100,000 in January of 1993 for 30 years. Their choices were:

1. A 7% bond for 30 years = guaranteed 210% income payments, return of original 100k in 2023

2. S&P 500 for 30 years*= ???

Dr. Frasier Crane, the always uptight and overthinking person, chooses the bond. The world is an uncertain place, and bonds offer a type of certainty he needs. Indeed, he would triple his money with little risk; collecting $7,000 annually for 30 years (a total gain of $210,000).

Agent Fox Mulder is more optimistic. He wants to believe that companies’ earnings can grow despite recessions, war, and tragedy. His $100,000 investment into the S&P 500 (dividends reinvested) paid off, as it grew to $1,589,409.

That’s over 5X what Frasier earned! Thus is the nature of compounding returns.

Today’s investment dilemma isn’t new,

it’s simply one most people haven’t had over the past decade. Bonds vs. stocks is a question that is as old as investing itself. It will probably be with us for the foreseeable future, and beyond.

There’s certainly nothing wrong with owning bonds, especially in a retirement income-focused portfolio. However, investors would be wise to hang onto some stocks as well, even as they age.

If history proves anything, it’s that great companies are resilient, and innovative, and can reward patient investors through even the most difficult environments. Indeed, 100-year stock market annual returns average nearly 10%.

*Source: S&P 500 Jan 1993 to Dec 2022 (DQYDJ.com)