Larry Swedroe is a principal and director of research for St. Louis-based Buckingham Asset Management. He has authored or co-authored seven books. Before joining Buckingham in 1996, he was a senior vice president at Citicorp and vice chairman of Residential Service Corp.

On Monday, IndexUniverse.com Managing Editor Murray Coleman caught up with Swedroe to discuss the plight of bonds and buy-and-hold investing, among other issues. (It should be noted that he and another Buckingham colleague, Joe Hempen, co-authored a book on bond investing in 2006.)

IndexUniverse: Did you recently suggest a portfolio of largely municipal bonds for investors?

Swedroe: That was a reference someone took from an example I was using concerning my own portfolio. I definitely wasn’t making a recommendation for everyone to use. There is no "right" asset allocation—or portfolio—for everyone. All of these cookie-cutter solutions people throw out are garbage. They’ve got about as much chance of being right as buying a lottery ticket.

It is important to note that my low-equity allocation does not reflect a negative view on stock returns. Instead, it reflects my own situation and that is that I have reached a point where my own marginal utility of wealth is very low. Therefore, I have little need to take risk.

IndexUniverse: What do you think about suggestions that bonds are now positioned as a less-risky asset class than equities over the long term?

Swedroe: People have recently conducted studies looking back at different longer-term periods and concluded that stocks aren’t likely to outperform bonds going forward. In my view, that’s nothing more than data-mining. It’s just absolute trash.

IndexUniverse: Why is that?

Swedroe: Let’s start with Jeremy Siegel’s book, “Stocks For The Long Run.” It was a very dangerous book if people took the wrong message away, which many did. The book implied to some investors that stocks aren’t risky if your investment horizon is long enough. I don’t think that Siegel was trying to claim that as a fact. But clearly, that’s the message many people took out of that book.

If there’s no risk, then the expected returns of stocks over any extended period would be about the same as bonds. That’s insanity. Stocks have returned roughly 10% a year over the past 80 years. The average price-earnings ratio has been roughly 15. If people thought there were no risks in stocks, then the PE would be much higher. If the expected return over 40 years for stocks and Treasuries were the same, which would you buy? It’s just irrational to think that stocks and bonds over the longer term have the same risk profiles.

IndexUniverse: So such arguments about the outperformance of bonds are simply data mining?

Swedroe: What they were doing is going back to a period when bond yields were higher and stock valuations were also higher. High stock valuations forecast low future returns, and vice-versa. From 1969 through 2008, both the S&P 500 and 20-year government bonds both earned 9% exactly. (And that's assuming one maintained a constant maturity of 20 years.) We started that period with high stock prices and ended with stock prices at low levels.

On the other hand, you started that period with high bond yields and ended it with low bond yields. The 20-year bond at the end of 2008 was 3.05%. That meant the expected return over the next 20 years was 3.05%. Do you think that stocks are going to give you a nominal return of less than 3% over the next 20 years? It can definitely happen. From the years of 1929-1948, stocks averaged a nominal return of 3.1%. That included the years of the Great Depression. But that period started with high stock prices. We’re starting this next period with relatively low PEs and low stock prices.

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