Much Ado About Equities

The U.S. Supreme Court is currently listening to arguments (which happen to have support from Vanguard founder John Bogle) regarding the ability to sue fund managers for passing along excessive fees to individual investors.

A favorable ruling could put a dent in the $90 billion of fees generated by the industry annually. 

Meanwhile, Robert Arnott who is the Chairman of Research Affiliates recently published a paper that questions the need to bother with investing in anything other than Treasury bonds.

Arnott's research sheds light on the relative performance of equities and bonds over a very long time horizon.  His findings include:

• The equity "risk premium" or expected return of stocks over bonds since 1802 is only 2.5%.
• Bonds have outperformed stocks for stretches well in excess of twenty years (including a 68 year stretch in the 19th century) on three separate occassions over the past couple hundred years.
• There has been a small negative risk premium (translation: bonds outperformed stocks) over the past forty years. 

Arnott's findings stand in stark contrast to much higher equity risk premium assumptions that provide the raison d'être for most of the equity mutual fund industry.