Why buy stocks if bonds are on top?

Paul J. Lim is a senior editor at Money Magazine. Email him at plim@moneymail.com.

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(Money Magazine) -- The most anticipated question on Wall Street is whether the bear market is finally over. But the bear's demise isn't of paramount importance, or at least it shouldn't be as far as you're concerned.

Bear markets come and go every five years or so. What's far more rare, and therefore more significant, are periods when stocks are beaten by bonds for a decade or longer. In all 880 rolling 10-year spans since the end of 1925 (starting with December 1925 to December 1935, then January 1926 to January 1936, and so on), bonds accomplished this feat only about 17% of the time. And those episodes were almost all clustered around four periods: the Great Depression, the 1970s, the early 1990s, and, of course, this past decade.

"For capitalism to work, there has to be a premium offered for taking risks in equities," says Steve Leuthold, a market historian and chief investment officer of the Leuthold Group. Yet over the past 10 years investors who bet on stocks ended up losing more than a fifth of their wager, while those who hid in bonds saw their money nearly double.

Sure, bond investors face their own set of risks (like meltdowns in the corporate sector). But bondholders are (almost always) among the first in line to recoup losses in a bankruptcy; common-stock investors are last.

So until the natural order is restored and equities offer higher rewards for assuming greater risk, bear market thinking will keep some buyers out of stocks, thus capping prices, even if the bear is dead.

That's the bad news. The good news is that extended stretches of equity underperformance have proved to be great buying opportunities for those investors who were patient and value-minded.

From the middle of stocks' barren stretch in the Great Depression (in 1934) the S&P 500 delivered an annualized return of 13.7% over the next 25 years. Similarly, if you invested in the early '70s, you would have gained 12.6% a year for the next quarter-century.

Thus far, the current period of bond outperformance has lasted nearly as long as in the 1970s. Does that mean a shift is imminent? No one truly knows. Even so, history suggests that over the long run it will pay to be bullish while others are stuck in a bear market state of mind.