Time for individual investors to abandon stock and long-term bond Ownership Society territory to the top 1%? (Especially too-big-to-fail Wall Street investment banks with direct access to the Fed’s below-market-rate lending programs…)
And by all means, don’t be dumb enough to invest in a residential real estate money pit unless you have plenty enough money to flush some of it down the toilet…
Robert Powell’s Your Portfolio
April 6, 2011, 12:01 a.m. EDT
Don’t buy stocks and don’t buy bonds
Two legendary investors have conflicting points of view
By Robert Powell, MarketWatch
BOSTON (MarketWatch) — Don’t buy stocks. Don’t buy bonds.
It’s not uncommon for money-management experts to have conflicting points of view. What’s hard though is squaring up those opposing opinions and trying to figure out what to do with your own money given conflicting theories.
Case in point: The latest missives from two legendary investors, Rob Arnott and Bill Gross. The former argues against stocks for the long-term and the latter argues against bonds, or at least U.S. Treasurys.
Arnott, the chairman of Research Affiliates, examined in his latest newsletter the equity risk premium in the U.S. since 1802 and argued that “concentrating the majority of one’s investment portfolio in one investment category (i.e. stocks), based on an unknowable and fickle long-term equity premium, is a dangerous game of ‘probability chicken.’”
Meanwhile, Gross, the founder of Pacific Investment Management Co., known as PIMCO, and manager of its flagship Total Return Fund (PTTAX 10.89, -0.02, -0.18%) , explained in his most recent newsletter that he had dumped his U.S. Treasury holdings at the end of February because he sees little value in the market given the nation’s mounting debt burden.
For his part, Arnott, who coincidentally manages two broad-based PIMCO offerings — All Asset Fund (PASAX 12.38, +0.01, +0.08%) and All Asset Authority Fund (PAUAX 10.82, +0.01, +0.09%) — made the following case against betting one’s life savings on stocks. Most professional and casual investors like to point to research that shows that U.S. stocks have delivered excess returns over long-term government bonds of 4.4% since 1926 or 2.8% since 1802. But the truth of the matter is that most investors don’t have investment programs of 200-plus years or even 80-plus. Instead, the relevant time period for most investors are much shorter, 10 or 20 years, maybe even 30 years.
And when you look at the annualized returns of stocks vs. other assets over one, two and three decades, what you find is this: Investors aren’t being rewarded for bearing the risk of holding stocks. In fact, the equity risk premium — how much stocks gained in excess of U.S. government bonds — for the 30-year period a measly 0.53%.
In other words, stocks market investors took the risk and got paid nothing in return. What’s worse, “investors who have incurred the ups and downs over the past decade have lost money compared to what they could have earned from long-term government bonds,” Arnott wrote. “They’ve paid for the privilege of incurring stomach-churning risk.”
To be fair, Arnott did note in his newsletter that stocks do have a high tendency to outperform government bonds over 10- and 20-year periods.
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