No doubt, stocks have been excellent long-term investments. Even after a disastrous 2008, large-cap U.S. stocks (as tracked by the S&P 500 and its predecessor indexes) have had total returns of 9.6% per year since the beginning of 1926, according to Morningstar's Ibbotson subsidiary. Fifty-year annualized returns through 2008 were 9.2%, 30-year returns were 11.0% and 20-year returns were 8.4%.

Because stocks can reasonably be expected to post similar returns going forward, they usually figure prominently in clients' portfolios. When you project annualized returns of 8% to 11% over a 20-, 30- or 50-year period, you can wind up with convincing evidence that clients who focus on stocks are likely to enjoy a comfortable retirement.

However, the past year's results were a grim reminder that stocks do not return 8% to 11% every year. There are deep potholes along the way, and the road seems to have gotten bumpier recently, with losses ranging from 9% to 37% in four of the past nine years. Clients who experience such losses just before they need funds may not appreciate those wondrous statistics about long-term stock market wealth building.

BRING ON THE BONDS

Where can financial planners seek those historic equity market returns without the painful setbacks? One place to start is in the bond market. Although bonds have lagged stocks in the very long term, recent results tell a different story. Long-term corporate bonds have outperformed large-cap stocks over the past 20 years, 8.7% to 8.4%. (Long-term government bonds have returned 10% a year in those 20 years, bolstered by a spectacular 2008.) What's more, long-term corporate bonds have posted only two down years in the past two decades: They lost 5.8% in 1994 and 7.4% in 1999. Going as far back as 1970, bonds have delivered equity-like returns with much less volatility than stocks.

The first half of 2009 produced more of the same parity between stocks and bonds, with a tilt toward fixed income. According to Morningstar, taxable bond funds returned 8.4%, on average, while domestic equity funds returned 7.2%. Can bonds continue to provide such results?

"We are bullish on fixed income in general," says Burt White, chief investment officer for LPL Financial in Boston. "We expect a continued acceleration of economic recovery, as we go from 'bad' to 'less worse.' That will bring more risk-taking by investors, as people realize that they won't achieve their goals by earning less than 1% from cash equivalents. Stocks can be risky, and corporate dividends have been under pressure. If people are willing to move away from cash and take some risk, they'll probably go into fixed income." More demand for fixed income would raise prices and bolster returns for existing bondholders.

SPLIT DECISION

Not all bonds are likely to prosper, though. White says that Treasuries may "dramatically underperform" after last year's boom, which drove Treasury bond yields down to negligible levels. Leslie Barbi, head of fixed income for RS Investments, a San Francisco money manager owned by Guardian Life, shares that assessment. "If you stay away from Treasuries and focus on bonds rated from A to BB, fixed-income returns could be in the ballpark that equities have produced," she says.

The distinction between Treasuries and other bonds became apparent in late 2008 when investors poured money into government issues and ignored other offerings. "We believe there has been a paradigm shift in fixed income," says Jonathan Beinner, chief investment officer and co-head of U.S. and global fixed income at Goldman Sachs Asset Management in New York.

"Corporate credit and government debt have become separate asset classes," he says. For the next few years, these asset classes may not move as closely together as they have in the past." In 2008, government debt far outpaced corporate fixed-income issues, but the reverse has been true so far in 2009.

According to Beinner, the corporate credit asset class may remain volatile over the next two to three years. "We think that risk-adjusted returns can be attractive, though," he says. "Corporate credits have the potential to produce returns in the mid to high single digits in the next few years, with less volatility than the equity markets. Spreads are still wide, and the narrowing of spreads may add to the total return for investors."

As of this writing, investment-grade corporate bonds were yielding more than 300 basis points over Treasuries, while so-called high-yield corporate bonds were yielding more-sometimes much more-than 500 basis points over Treasuries. Those spreads are far above historic norms; if they narrow to normal dimensions-and if part of that narrowing results from yields dropping on corporate bonds-investors holding corporate issues could enjoy total returns near double digits.

CORPORATES ON TOP