In a recent discussion with the Globe and Mail, Enough Bull (read my review here) author David Trahair once again made a case for investing exclusively in GICs. Unfortunately, I don’t think it is a persuasive case. First, he compares TSX total returns with GICs over various time periods and despite a premium from stocks ranging from 2% to 6%, he says “GIC returns seem to be competitive”. Michael James showed that even modest premiums when compounded over time result in a huge difference in the ending value.
Mr. Trahair then says that expenses and emotions take a toll on the equity premiums:
The last point is emotions – were you able to hold on when your equities lost almost 50% of their value from June 18, 2008 to March 6, 2009?
It is a fair point — something that, hopefully, won’t come as a surprise to regular readers. But is it valid to assume that fixed income investors are not prey to emotions? Does the low volatility of fixed income help investors to stay invested? Let’s turn to the DALBAR study of investor behaviour for some answers.
The DALBAR study found that investors in both stocks and bonds experienced much lower returns than the comparable indices. Over a 20-year period ending in 2008, stock investors underperformed the index by 6.48%. Bond investors didn’t do much better — they underperformed by 6.66%. Interestingly, stocks performed poorly over the 5- and 10-year period ending in 2008 but stock investors didn’t do much worse. But, bond investors once again underperformed by 6% over the same time period.
As bonds have much lower volatility than stocks, it is likely that bond investors are hurt by greed rather than panic. It is hard not to chase the latest ‘it’ investment when everyone else is piling into it.