Comparing equity and bond returns - where is the risk premium?

Bonds have generally outperformed stocks for most 36 month rolling return period since 2004. This is not an accident of slight differences. The figure above surrounds the rolling return with a circle associated with the rolling standard deviation. Bonds show more stable and higher returns.

The significance of this relationship is that the belief that equities will always outperform bonds does not hold. It did not hold before the recession. Now theory tells us that the expected retrn not actual returns is what matters, but real performance is very informative. A passive stock bond portfolio with a higher weight to equities may not be the best strategy for most investors. The recent positive run is stocks has been spectacular but not enough to offset the earlier loses from 2008. The three year rolling return for bonds is still higher.