Posts Tagged ‘U S Treasury Bonds’
Stocks for the Long Run? Not so fast Jeremy
Friday, October 9th, 2009
John Keefe, columnist for CBS MoneyWatch, FT.com, and ex-Wall Streeter, refutes Jeremy Siegel’s “Stocks For the Long Run,” FT.com Op-Ed, stating that there is no long run, only many short runs.
Here is an excerpt:
The author and promoter of Stocks For The Long Run, Professor Jeremy Siegel of The Wharton School, is back. A few days ago in an op-ed submission Siegel revved up his old hypothesis - that investing in stocks always beats investing in bonds, sort of. In my view, his advice for individual investors was simplistic and dangerous when it was fresh in 1994, and seeing that Dr. Siegel’s patter has not been informed by the two stock market crashes since then, the message has become only more so. (This is a long post, but worth it; please bear with me.)
I. The beating stocks took in 2008 and 2009 did plenty to disprove, or at least soften up, Siegel’s hypothesis. At the stock market low in March, “stocks for the long run” (hereinafter SFTLR) was in tatters, because at that point, the returns to U.S Treasury bonds had beaten equities for the prior 40 years. (If 40 years doesn’t constitute the long term, I don’t know what does.)
Therefore this week I was disappointed to see that the Financial Times, a publication that I adore and sometimes have the privilege of writing for, had given Dr. Siegel time on its podium. Here’s a sample of his defense of SFTLR:
[F]or the 13 10-year periods of negative returns stocks have suffered since 1871, the next 10 years gave investors real returns that averaged more than 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all 10-year periods, and is twice the return offered by long-term government bonds.
Strong future returns also followed poor returns if one extends the analysis to the worst-performing of all 127 10-year stretches since 1871. Without exception, for each 10-year return that fell in the bottom quartile, the following 10-year period yielded positive real returns and the median return exceeded the long-run average…
He went on to suggest that the comparison with bonds for the last 40 years wasn’t fair, because their returns had been above average. Huh? He didn’t omit the above-average years for stocks.
You can read the whole article here.
Tags: Bottom Quartile, Cbs Moneywatch, Financial Times, Future Returns, Government Bonds, Hypothesis, Individual Investors, Investing In Bonds, Investing In Stocks, Jeremy Siegel, John Keefe, Patter, Professor Jeremy, Promoter, Stock Market Crashes, Tatters, U S Treasury, U S Treasury Bonds, Wall Streeter, Wharton School
Posted in Markets | No Comments »
David Swensen: How to Sleep Soundly
Monday, March 16th, 2009
Yale’s Alumni Magazine for March/April 2009, features Marc Gunther’s interview with Yale Endowment’s Super-Investor, David Swensen, and details some of Swensen’s key advice to investors about portfolio management. It is a must read. Here is an excerpt.
In just under a quarter-century as Yale’s chief investment officer, David Swensen ‘80PhD has generated Bernard Madoff-like returns — except that Swensen made his money honestly. Under his leadership, Yale’s endowment has generated an astonishing 20 consecutive years of positive returns, from 1988 to 2008.
Yale Alumni Magazine: Has it been a difficult time for you?
Swensen: In some ways, yes. I absolutely love the idea of producing ever-increasing levels of support for Yale. Looking ahead to the next few years, that’s not going to be in the cards. That’s a difficult reality to deal with.
But in terms of the day-to-day work, managing through this economic and financial crisis is absolutely fascinating. It’s exhausting, but fascinating.
Y: It may be fascinating to you, but it’s discouraging for those of us who have watched our 401(k) values plummet. Given all the turmoil and uncertainty, what should individual investors do?
S: If an individual investor followed the program I outlined in Unconventional Success [see box], they probably did reasonably well, through the crisis, thus far. They’d have 15 percent of their assets in U.S. Treasury bonds. They’d have another 15 percent in U.S. Treasury inflation-protected securities. Those two asset classes have performed well.
Of course, the other 70 percent of assets are in equities, which have not done well. With all assets, I recommend that people invest in index funds because they’re transparent, understandable, and low-cost. So, the equity holdings have gone down step-by-step with the declines in the market.
I recommend that investors rebalance.
But I also recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity. People can sell the Treasury securities that have appreciated dramatically to bring their allocation to the 15 percent target, and they can redeploy those funds into domestic equities and foreign equities and emerging market equities and real estate investment trusts, all of which are now much cheaper, and therefore have higher prospective returns.
Y: Explain this idea of asset allocation, please.
S: Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It’s overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.
Y: How can that be?
S: It’s because the other two factors, security selection and market timing, are a net negative. That’s not surprising. They’re what economists would call zero-sum games. If somebody wins by buying Microsoft, then there has to be a loser on the other side who sold Microsoft. If it were free to trade Microsoft, the amount by which the winner wins would equal the amount by which the loser loses. But it’s not free. It costs money. It costs money in the form of market impact and commissions if you’re trading for your own account, and it costs money in terms of paying fancy fees if you are relying upon an investment advisor or mutual fund to make these security-specific decisions. For the community as a whole, all those fees are a drag on returns.
That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.
Y: So people should not be afraid of stocks now?
S: Not only should they not be afraid, they should be enthusiastic. One of the great ironies is that if you had talked to the average investor 18 months ago, he or she would have thought it was a pretty good idea to buy stocks. In recent months, the same investors despair about their portfolio and are fearful about putting money into the equity market.
That’s 180 degrees wrong. They should have been cautious 18 months ago, when prices were much higher than they are now. They should be enthusiastic today.
Y: That runs counter to human nature.
S: That’s one of the really tricky things about the investment world. It’s very different from a lot of things we deal with, day in and day out. If you talk to a businessman, a businessman is going to feed the winners and kill the losers. But in the investment world, when you’ve got a winner you should be suspicious about what’s next. And if you’ve got a loser, you should be hopeful — although not naively hopeful.
To read the whole interview, plus the additional material, click here. (make sure you read the items highlighted in blue on the right hand side)
Tags: Asset Classes, Bernard Madoff, Chief Investment Officer, David Swensen, Equity Holdings, Index Funds, Individual Investor, Individual Investors, Inflation Protected Securities, Marc Gunther, Portfolio Management, Quarter Century, Rebalance, Rebalancing, Treasury Inflation Protected Securities, U S Treasury, U S Treasury Bonds, Unconventional Success, Yale Alumni Magazine, Yale Endowment
Posted in Bonds, Emerging Markets, Markets, Oil and Gas | No Comments »
Yale’s Swensen: “Extraordinary Opportunities in Distressed Debt
Monday, January 5th, 2009
Legendary Yale University Endowment investor, David Swensen, says there are extraordinary investment opportunities in the credit world and is “pursuing a recovery” by acquiring distressed debt.
“There are some really extraordinary opportunities in the credit world,” said David Swensen, the school’s investment chief, in a phone interview from his office at the New Haven, Connecticut, university. “Everything, from bank loans to investment-grade bonds to less-than-investment grade bonds, is priced at really extraordinarily cheap levels.”
Among Swensen’s core principles identified in “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment” (Free Press, 408 pages, $35) is the importance of diversifying holdings while focusing on equities. In a recession, the advantages of diversification get overwhelmed by investors’ selling equities in favor of U.S. Treasury bonds in a “flight to quality,” he said.
“When you have a market in which any type of equity exposure is being punished, it’s going to hurt long-term investors,” he said.
In the current environment, distressed corporate securities can produce “equity-like” returns, Swensen said.
“You want to make sure you’re with companies that have the ability to survive in a really tough economic environment” he said, declining to name any of the companies.
Until financial institutions resume lending, the economy will remain stagnant, Swensen said.
“I don’t think the Fed or the administration has figured out how to fix credit markets,” he said. “We are going to experience economic and financial stress as long as the credit markets are broken and it’s not until we start seeing the credit markets functioning properly will we be able to see a path to economic recovery.”
Swensen advocates federal guarantees for deposits in money- market funds as a way to encourage investment in the vehicles that buy corporate debt.
Source: Bloomberg.com, January 2, 2009
Tags: Advantages Of Diversification, Bank Loans, Connecticut University, Corporate Securities, Credit Markets, David Swensen, Distressed Debt, Equity Exposure, ETF, Federal Guarantees, Financial Stress, Institutional Investment, Investment Grade Bonds, Money Market Funds, New Haven Connecticut, Term Investors, U S Treasury, U S Treasury Bonds, Unconventional Approach, University Endowment, Yale Endowment, Yale University
Posted in Bonds, Credit Markets, Economy, Markets | No Comments »
