Bonds vs. StocksBy HIBAH YOUSUF

Bonds have outperformed stocks over the last 30-year period, but that's about to change, experts warn.

"Bonds are not the safe haven that they used to be," said Michael Sheldon, chief market strategist at RDM Financial Group. "Interest rates have been declining since the early 1980s but now we're heading into a period of rising rates, which means that investing in the bond market will be a lot more challenging over the next few years."

Investors with stakes in long-term Treasuries are already feeling the pain.

As the 10-year Treasury yield recently crept up to 2% from its record low of 1.4% last July, the iShares Barclays 7-10 Year Treasury ETF (IEF) and the iShares Barclays 10-20 Year Treasury ETF (TLH) declined 3%, while the iShares Barclays 20+ Year Treasury Bond ETF (TLT) dropped 10%.

If the 10-year yield rises back to the level it was before the financial crisis (around 5%), bond funds could plunge 25%, said Fred Dickson, chief market strategist at KDV Wealth Management.

The threat of rising yields is especially worrisome for individual investors, who have poured more than $1 trillion into bond funds in the aftermath of the financial crisis, according to the Investment Company Institute.

That trillion-dollar inflow has led to an overcrowded market.

"Investors have way too much exposure to the bond market," said Christian Magoon, CEO of Magoon Capital. "They're invested in bonds for their perceived safety, so they'll likely be extra sensitive to the price moves. Losing 10% or 20% in the bond market feels like losing double that amount in the stock market."

The risk is even more alarming when you consider valuations, added Dickson. The bond market "looks eerily similar" to the overvaluation of the stock market at the height of the Dotcom bubble, he said.

By comparison, the S&P 500, which is near a new record high, is trading at less than 14 times 2013 earnings estimates. Even at its all-time high in October 2007, the S&P 500's valuation was just above 17.

"There are certainly also risks in the stock market, and there's always a possibility of a correction," said Magoon. "But relative to bonds, stocks look much safer over the long term. And without more exposure to stocks, most investors won't be able to get the kinds of investment growth and the ability to fight inflation that they need to meet their retirement goals."

That's because stocks usually offer better returns than bonds. On a historical basis, stocks deliver an average annual return between 6% and 7% after inflation, according to Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School. At best, bonds have historically returned up to 1%, after inflation.

Of course not all bonds are created equal. Experts like Magoon are investing in debt issued by emerging markets like Mexico, where the fiscal and debt outlooks are brighter than those of developed countries, including the United States.

More from CNNMoney:

Increase your money and finance knowledge from home

Advice for Recent College Grads

Prepare yourself for the "real world".

View Course »

Intro to different retirement accounts

What does it mean to have a 401(k)? IRA?

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

I have been staying away from bonds for awhile now, due to this happening someday soon. Stocks, very limited new money put in there. Real estate (expensive rentals) is where I have been in investing in heavily the last 18 months. With the high rents and low interest rate, cash flows have never been better, some deals ROI as high as 33%/year, but tyically more like 27%.

February 22 2013 at 6:33 PM Report abuse rate up rate down Reply

**** this post

February 22 2013 at 5:26 PM Report abuse rate up rate down Reply

The best investments are precious metals - GUNS AND BULLETS! I have made an average of 300% for the past four months! I knew the latest anti-gun crisis would happen, so I stocked up. Better than gold or silver.

February 22 2013 at 4:40 PM Report abuse rate up rate down Reply
2 replies to Richard's comment

how do you cook those items?

February 22 2013 at 5:25 PM Report abuse +1 rate up rate down Reply

gotta love obama,best thing for gun and ammo companies.

February 23 2013 at 10:43 AM Report abuse rate up rate down Reply

The likelyhood of a 5% Treasury Note yield anytime in the foresseable future is close to Slim and None. From the early 1990's until about 1998 the Japanese 10 Year Note yield fell from around 7.00% to below 1.00% and since then has never risen above 2.00%. In my view the US Economy has many of the same attributes as the early 1990's Japanese economy albeit maybe not as severe. I can see a 3.00% (give or take a little) 10 Year Note yield but even that is not very likely anytime soon. I wouldn't be so worried about bonds. Investors need to manage their expectations and expect overall lower returns in both stocks and bonds until the economy becomes decisively and significantly more robust which is NOT very likely anytime soon.

February 22 2013 at 3:49 PM Report abuse rate up rate down Reply
1 reply to Dave's comment

I would agree and furthermore, if we are to decipher the actions of the Fed, which has been to continue their quantitative easing, they don't think this economy will grow significantly enough to push yields that much higher either. I would favor their understanding and view over the notion that yields could go higher and agree investors should not panic, but gradually move to the middle in terms of their overall diversity and allocation strategy. One thing is for sure, whatever your strategy, if you're in stocks and bonds, you're in for the long haul and if you need the money, you should not be in either.

February 23 2013 at 12:01 PM Report abuse rate up rate down Reply

The bonds apocalypse is coming as they are historically high and will be in for an adjustment if our government doesn't do something about the fraudulence in the derivatives market that the too big to fail banks are still perpetrating on the economy. In the last bank depression the banks were broken up, and this depression will not be over, and will end in failure again, if our government doesn't break them up again, and let the investment banks fend for themselves, with their own money, not our tax dollars and savings. This is an economy base on debt ever expanding, in a virtual world that is bases on leverage and deception.

February 22 2013 at 3:22 PM Report abuse +1 rate up rate down Reply


February 22 2013 at 2:27 PM Report abuse rate up rate down Reply
dr scott kanner

Take it out and spend it...enjoy yourselves today.... because tommorrow it will be all gone.

February 22 2013 at 12:13 PM Report abuse +1 rate up rate down Reply
1 reply to dr scott kanner's comment

not gone-they gov't will have it-just transferred

February 22 2013 at 2:28 PM Report abuse +1 rate up rate down Reply

i am invested in mostly tax free bonds. I don\'t care if the value on the bonds drop. I bought for long term income.
As long as i get the interest payments of the dividends on my div paying stocks and bonds i am ok with it. Yes , some bonds might be called but that will give you the chance to buy again at a higher int rate. I do have Closed end mutual funds that pay nicely since i am retired and they are in my retirement account

February 22 2013 at 11:37 AM Report abuse +1 rate up rate down Reply

The money that will run out of bonds will run to the market setting up it's inevitable 20% retreat.Collusion amongst banks,hedge fund "naked shortd" oil speculation and government has scrambled the financial structure to the point of choas.There will be no "happy ending except for the Big Boys that have enough government money (85 billion a month to win their rigged game. Iceland did the right thing 4 years ago and China and Iran may have an idea or two about "crimes against the economy.

February 22 2013 at 10:16 AM Report abuse rate up rate down Reply