Matthew Emmert's Response

Matthew sent the following email in reponse to my post about his article. One thing about my post is I clearly should have used the word volatility and not the word risk. Other than that I will leave it to you decide for yourself.

One other thing, I am getting some hits from some sort of Motley Fool message board. I wonder if he trashed me, its all fair game.

Hi Roger,

First, thank you for the very kind words in your post.

On the points in your post regarding my article, I would offer the following:

I believe I was actually a bit more specific in the article than you denote, as I clearly stated that Treasury bonds are the least compelling option in the bond world right now, not all bonds. I further stated that -- even so -- TIPS still present a reasonable return potential in that universe.

However, you're absolutely right in that my main point in the piece was that dividend-paying stocks do represent a better option than most bonds, for most investors, right now (the "most" term must be stipulated, as certainly you recognize the limitations of addressing a broad class of investors within a 1,000 word article).

Your statement that bonds are -- by default -- always less risky than stocks (specifically dividend-paying stocks), and that they are automatically the choice for those seeking safety is exactly the kind of flawed logic that I was attempting to negate with this article.

Indeed, what's so safe about a 0% return, no matter the level of stability that one experiences along the way to that return? My point is simply that substandard returns pose a material risk in their own right, and in my opinion investors looking at long-term bonds (particularly Treasuries) are facing such returns. Though admittedly this is just a single example to demonstrate my point, I would say that the chart at the following link could give one an idea of the "risk" of investing in bonds over stocks for longer time periods that I'm talking about:

http://tinyurl.com/4oslo

Again, certainly there will always be individual opportunities to make money within any asset class and any market. But taken as a whole, current yields represent a poor risk/reward trade off in my opinion.

Your statements also seem to suggest that stocks and bonds never move together, or that bonds always posses less price risk in a down market than stocks, yet this is not always the case. Bond and stock prices have been highly correlated over many periods, as they are often affected by the same things (i.e., neither bonds nor stocks favor inflation or higher interest rates).

So, yes, in this specific environment, I'm saying that there are many, many cases where investors would be better off buying high-quality, dividend-paying stocks as opposed to bonds. Clearly, the factors that influence this decision can change very quickly (as they did back in April and May of 2004 when yields went substantially higher on initial interest-rate fears), and if that happened I would alter my recommendation to reflect the change. However, again, if I had money to put to work right now, today, that money would be in high-quality dividend payers, not bonds.

Feel free to post this response to your blog. Wish you continued success with your business and the site.

Foolish best,

Mathew Emmert (TMFGambit)