Stan Richelson and his wife, Hildy, run Scarsdale Investment Group Ltd. The Blue Bell, Penn.-based firm oversees about $130 million in U.S. bond portfolios for individual investors. The pair has written four books on the topic of investing in bonds. For the past 25 years, they've been advocating the case for bonds versus stocks as core holdings.

IndexUniverse.com's Murray Coleman recently caught up with Stan to discuss prospects for bonds going forward and their proper place in long-term portfolios.

IU: Did Rob Arnott's recent article in the Journal of Indexes validate work you've been doing for years?

Richelson: It was the best article I've ever read. It has not only validated our approach, but it has improved my life immensely.

IU: How so?

Richelson: When clients of ours used to speak to friends and family and explain that they were investing in our all-bond portfolios, they'd tell them they were crazy. So in the past, we had to tell our clients to keep it to themselves—they don't deserve that kind of abuse.

IU: What has been the response of your peers?

Richelson: Other fee-only advisers have been telling us for years that we were unprofessional because we didn't allocate assets the way they did. But after two stock market collapses in the last nine years, all of a sudden we've become very popular. Everyone wants to talk to us now—we're getting quoted in all sorts of publications. Our views have been the same for 25 years. It's finally starting to sink in with more people that their belief in stocks always outperforming bonds is all just a giant erroneous paradigm. And what's so huge about the Arnott article is that he goes back more than just 40 years. He looks back at various periods over the past 200 years to show that bonds have outperformed stocks during many longer periods.

IU: How has Arnott's work helped to advance previous studies on fixed income?

Richelson: The Arnott article said that bonds have outperformed stocks over the past 10, 20 and 40 years. We didn't have that article when we wrote our last book, "Bonds: The Unbeaten Path To Secure Investment Growth," when we working on it during late 2006 and early 2007. We used the Ibbotson data, which said that since 1926, stocks provided an average annualized return of about 10% and long-term Treasuries returned about 5%. So you'd think that stocks greatly outperformed bonds. But what the Ibbotson data didn't take into account was the impact of income taxes, fees and expenses on returns for individual investors. The Ibbotson data also doesn't properly account for the bad timing of individuals in timing stock markets.

If you compare stocks to tax-free muni bonds, for example, that 10% return for stocks just doesn't hold up over time. If you include those three factors—taxes, fees and bad timing—you see that the stock return comes down to about the return on a tax-free muni bond. That is the theme of the first chapter of our bond book.

IU: In your latest book, you also compare risk-adjusted returns between stocks and bonds, don't you?

Richelson: Yes, when you adjust for the risk of stocks as compared to high-grade bonds, there really isn't any comparison. Bonds are much safer. We're not discussing junk or anything of that sort.

IU: If you had all of this research already, what did Arnott's article add?

Richelson: Our comparison of stocks and bonds was very untraditional. Nobody ever challenged the Ibbotson data. I'm sure it's correct as far as it goes. What we did was to make some adjustments. What Arnott did was use Wall Street's methodology exactly as Wall Street compares stocks and bonds. He used long-term Treasuries and compared it to the S&P 500, including dividends, and marked to market in the traditional way every year. So he more than confirmed what we'd been telling people for years.

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