By Scott Burns

Q. My father is a wealthy man. He is totally risk averse. The only stocks he ever owned were the stock options he exercised at the company where he was an executive. When he retired as President of the company in 1989, he sold all his stocks. Since then he has kept his money in CDs and T-bills.

From everything I have read, this is not a good investment strategy. His theory is that he will be fine if he never loses money. Of course he is losing purchasing power if you consider inflation, but I understand his theory. His assets do not fluctuate with the market. He has enough money and he lives modestly enough that the loss of purchasing power through inflation is not really a concern to him.

But I was shocked to read that bonds have outperformed stocks over the past 3 decades. Since 1981, long-term Treasury bonds have gained 11.5 percent a year on average, beating the 10.8 percent average increase in the S&P 500. Maybe my dad is not so crazy after all. I am curious about your take on that. —E.D., Austin, TX

A. The return you experience in stocks or bonds depends very much on the particular year in which you start. It also depends very much on the length of the investment period. The longer the time period, the greater the probability that stocks will outperform assets like bonds and Treasury bills, according to data from Ibbotson Associates.

It is not surprising that long-term bonds have outperformed stocks since 1981 because in 1981 long-term Treasury bonds had yields that were greater than the average annual total return on common stocks. That made long bonds a very good bet back then. Few, however, were willing to make the bet due to the high inflation rate we were experiencing at the time, 8.9 percent.

Actually, your father didn’t do better than stocks because he wasn’t invested in bonds. He was invested in cash alternatives that seldom gain value and seldom return much more than the rate of inflation.

Most investors enjoy better returns and lower risk by having a very diversified portfolio with a balance of equities and fixed income. They also have a better shot at having their income keep up with inflation. If you were receiving $1,000 of interest income on a bond in 1981, for instance, the purchasing power of that interest income is now about $400.

So your father might have done better. Fortunately, he didn't need to.

Q. In a recent column you did a rough evaluation of Social Security benefits using an immediate annuity web site. You indicated that an inflation adjusted annuity would cost about 50 percent than a fixed annuity to compensate for inflation, as Social Security does. I can understand that an adjustment needs to be made, but 50 percent sounds high. So how did you determine that percentage, realizing it would also be a function of age, and without going into an extensive analysis? —F.E., Plano, TX

A. There are two companies that have offered inflation-adjusted life annuities. I developed the 50 percent figure by comparing the cost of a traditional fixed life annuity for a given income with the cost of an inflation-adjusted life annuity with the same starting income. Yes, intuitively adding 50 percent to the cost of an annuity seems high— but this is just more evidence that all of us tend to underestimate the real burden of inflation.

The companies providing the inflation-adjusted life annuities can't afford to underestimate and it is reflected in what they charge for inflation adjusted income.

As you suggest, the younger you are, the more you will have to pay for an inflation adjusted life annuity. On a recent visit to the Elm Annuities website, for instance, I found that a $100,000 deposit would bring a fixed life income of $420 a month for a 55 year old man. It would bring only $268 a month as a starting income if it were inflation adjusted. So it costs an additional 57 percent to get an inflation-adjusted income at 55. By age 65 inflation adjustment costs only 39 percent more.

Here's a link to the figures: http://www.principal.com/retirement/incomeannuity/elm/income.htm