While equity markets have experience a strong climb since the March 2009 lows, investors are reevaluating the level of risk they want to carry in their portfolio. Over the past 10 years the return on equities has been minimal, even negative in several asset classes. Someone who had invested in long-term bonds ten years ago would have had a better return than someone who invested in equities. These are the reasons why investors are questioning whether investing in equity funds over bond funds is truly worth the risk.
Historically speaking, the answer would be yes. Looking at a historical chart of the S & P (American stock index) going back all the way to 1881, the 10yr return on equities over long-term bonds has been just around 6%. In other words, stocks have outperformed bonds by an average of 6% since 1881. Studies using data from 1950 onwards show an even higher outperformance of 7-8%.
The same chart would show that besides this current period, long-term bonds have outperformed 10-yr return on equities at only two other points in the past 70 years. Each point was followed by a strong upward spread between equity returns and bond returns.
Although certain years may be marked by discouraging returns, in the long-run everything always reverts back to the mean.