Burton Malkiel has been speaking up a lot lately, and with much the same message – repeated several times over the last few months (at least since an op-ed back in April). While hitting on some of the same themes he’s hit on for 40 years (index funds, low costs, broad diversification, don’t time the market, don’t overpay for active management), he’s been focusing lately on the state of the bond market.
As he says in today’s WSJ op-ed piece:
… equities today are more attractive relative to bonds than at any other time in history. Locking retirement funds into “safe” 1.5% yielding Treasury securities is likely to be a sure loser after inflation. We live in a world where the developed nations are saddled with large indebtedness relative to income (i.e., GDP) and large fiscal deficits. Moreover, our aging populations will put even greater strains on entitlement programs over time. Thus far, the major action taken in Washington with respect to entitlements has been to increase coverage, not decrease costs. The political path that seems easiest is to keep interest rates low and hope that inflation will eventually reduce our indebtedness as it has in the past.
The case is strong. Apparently, the only ways out of the fiscal disaster we are facing are (a) growth and (b) inflation. And in both cases, or a combination of them, stocks beat bonds handily. In a growth environment, equity owners participate in the growth. And in an inflationary environment, bondholders get paid back with money worth less than they lent out. Even if interest rates stay where they are, the return due to current bond yields is not going to be enough to overcome inflation and build a growing portfolio for retirements. If interest rates go up, bond portfolios are going to be hit hard. And as low as interest rates are now, betting that they will go down even more doesn’t seem like a likely proposition. So a portfolio more heavily weighted in stocks remains one’s best hope for long-term portfolio performance.
In the op-ed piece, Malkiel also takes on the recent fiasco concerning Knight Capital and high frequency trading. The remaining theme that he’s talked about recently, which was not really covered in this piece, is investing in emerging markets (whether directly or indirectly – for example, Malkiel in another talk recently discussed China and the fact that China cannot actually grow enough food to feed itself – so the case for benefiting from China’s growth may well argue for investing in the countries which feed China).
Anyway, as usual, Malkiel is well worth reading. Enjoy!
Even Amid the Current Turmoil, Stocks Still Beat Bonds
Investors saving for retirement have no reason to fear day-to-day volatility.
The stock market continues to reflect the very modest economic recovery now under way in the United States. From January 2011 through mid-August 2012, the S&P 500 has produced moderate single-digit total returns. But many individual investors are not participating. Some $200 billion has flowed out of equity mutual funds since January 2011. Even more has flowed into bond funds, leading bond king Bill Gross to proclaim “the cult of equity is dying.” Yet I believe that investors who pull their money out of the stock market today to invest in bonds are making a huge mistake.