1 00:00:00,200 --> 00:00:04,800 Speaker 1: Stocks have outperformed every other asset class over the long run, 2 00:00:05,000 --> 00:00:07,840 Speaker 1: assuming you measure the long run at about twenty plus 3 00:00:07,960 --> 00:00:12,360 Speaker 1: years real estate, gold bonds. It's hard to find anything 4 00:00:12,400 --> 00:00:15,640 Speaker 1: that has a track record as good as equities since 5 00:00:15,720 --> 00:00:21,160 Speaker 1: the late nineteenth century. The challenge stocks can be risky, 6 00:00:21,320 --> 00:00:24,280 Speaker 1: even voladal over long periods of time, and there are 7 00:00:24,320 --> 00:00:27,680 Speaker 1: so many different approaches to investing that it can get confusing. 8 00:00:28,200 --> 00:00:30,720 Speaker 1: But as it turns out, there are some ways you 9 00:00:30,760 --> 00:00:34,040 Speaker 1: can take advantage of equities as an asset class that 10 00:00:34,159 --> 00:00:34,920 Speaker 1: work well. 11 00:00:35,400 --> 00:00:35,919 Speaker 2: If you're a. 12 00:00:35,840 --> 00:00:36,960 Speaker 1: Long term investor. 13 00:00:39,479 --> 00:00:40,559 Speaker 2: We'll find that. 14 00:00:45,880 --> 00:00:49,200 Speaker 1: I'm Barry Redults and on today's At the Money, we're 15 00:00:49,240 --> 00:00:53,160 Speaker 1: going to discuss how to use equities in your portfolio 16 00:00:53,479 --> 00:00:56,080 Speaker 1: for the long run. To help us unpack all of 17 00:00:56,080 --> 00:00:58,760 Speaker 1: this and what it means for your investing, let's bring 18 00:00:58,760 --> 00:01:02,240 Speaker 1: in Jeremy Schwartz. He's the global chief investment officer at 19 00:01:02,280 --> 00:01:06,760 Speaker 1: Wisdom Tree Asset Management and the longtime collaborator with Wharton 20 00:01:06,840 --> 00:01:11,440 Speaker 1: professor Jeremy Siegel, whose book Stocks for the Long Run 21 00:01:11,720 --> 00:01:16,319 Speaker 1: has become an investing classic. So Jeremy, let's start with 22 00:01:16,360 --> 00:01:20,680 Speaker 1: the basics. What does the historical data say about stocks? 23 00:01:21,240 --> 00:01:24,520 Speaker 2: Well, your intro hit it exactly perfectly. It has been 24 00:01:25,160 --> 00:01:29,400 Speaker 2: the best long term return vehicle. Now, you know, today's 25 00:01:29,440 --> 00:01:32,399 Speaker 2: a time we're all thinking about inflation. We've had very 26 00:01:32,440 --> 00:01:35,120 Speaker 2: high inflation, and this is where people say, well, does 27 00:01:35,160 --> 00:01:38,679 Speaker 2: inflation change the case for stocks? And you know, is 28 00:01:38,840 --> 00:01:42,240 Speaker 2: higher inflation a risk to stocks thesis? And we say, 29 00:01:42,520 --> 00:01:45,360 Speaker 2: you know, stocks are not just a good hedge for inflation, 30 00:01:45,480 --> 00:01:47,160 Speaker 2: they're the best hedge for infort right. 31 00:01:47,240 --> 00:01:50,120 Speaker 1: If revenue goes up, if profits go up, stock prices 32 00:01:50,120 --> 00:01:50,480 Speaker 1: are going. 33 00:01:50,400 --> 00:01:50,720 Speaker 2: To go up. 34 00:01:50,800 --> 00:01:51,000 Speaker 1: Yeah. 35 00:01:51,000 --> 00:01:53,280 Speaker 2: Over the very long term, you see stocks have done 36 00:01:53,440 --> 00:01:56,120 Speaker 2: in Siegel's dat he had his two hundred years plus 37 00:01:56,160 --> 00:02:00,160 Speaker 2: of returns across stocks, bonds, bills, gold, the dollar or 38 00:02:00,520 --> 00:02:03,000 Speaker 2: you had six and a half to seven percent over 39 00:02:03,040 --> 00:02:06,560 Speaker 2: all long term time periods above inflation. Okay, and that 40 00:02:06,640 --> 00:02:09,200 Speaker 2: was a stable return. We could talk about factors that 41 00:02:09,320 --> 00:02:12,360 Speaker 2: change that looking forward, but you know, six seven above 42 00:02:12,400 --> 00:02:15,840 Speaker 2: inflation with a pretty smooth line. Nothing had that same 43 00:02:16,160 --> 00:02:19,080 Speaker 2: stability of constant real returns over time. 44 00:02:19,280 --> 00:02:21,760 Speaker 1: So we're talking about the long run. How do you 45 00:02:21,840 --> 00:02:25,520 Speaker 1: define the long run? What is the sort of holding 46 00:02:25,560 --> 00:02:28,880 Speaker 1: period that investors should think about if they want to 47 00:02:28,919 --> 00:02:30,080 Speaker 1: get all of those benefits? 48 00:02:30,400 --> 00:02:33,560 Speaker 2: We tend to think of seven to ten years as 49 00:02:33,600 --> 00:02:38,000 Speaker 2: a good forward looking indicator. There are periods where stocks 50 00:02:38,040 --> 00:02:41,040 Speaker 2: can go down. The longest period we had in our 51 00:02:41,120 --> 00:02:44,640 Speaker 2: data was seventeen years of losses of persing power, so 52 00:02:44,760 --> 00:02:46,400 Speaker 2: after inflation, persing. 53 00:02:46,080 --> 00:02:48,280 Speaker 1: Power eighty six to eighty two was exalting. 54 00:02:48,400 --> 00:02:51,160 Speaker 2: Yeah, and that was exactly around that time. And you know, 55 00:02:51,240 --> 00:02:53,320 Speaker 2: bonds had a double that time period, so they had 56 00:02:53,320 --> 00:02:56,160 Speaker 2: a thirty five year period where it had negative real returns. 57 00:02:56,360 --> 00:02:58,800 Speaker 2: You didn't have TIPS bonds back in the day. Tips 58 00:02:58,840 --> 00:03:02,400 Speaker 2: are treasury inflation technive securities that get an adjustment for inflation. 59 00:03:02,680 --> 00:03:05,800 Speaker 2: So the primary risk to bonds was that inflationary period. 60 00:03:06,400 --> 00:03:09,679 Speaker 2: But you actually had negative TIPS yields not too long ago, 61 00:03:10,160 --> 00:03:12,960 Speaker 2: just before this recent increase in rates, eighteen months ago, 62 00:03:13,000 --> 00:03:14,000 Speaker 2: you had negative yields. 63 00:03:14,120 --> 00:03:17,040 Speaker 1: You know, So if I'm a long term investor, if 64 00:03:17,080 --> 00:03:20,360 Speaker 1: I'm going to hold on to my portfolio for ten 65 00:03:20,480 --> 00:03:23,840 Speaker 1: or even better twenty years, what are the best strategies 66 00:03:23,880 --> 00:03:25,680 Speaker 1: to use to capture those returns? 67 00:03:26,000 --> 00:03:28,880 Speaker 2: You know, we do believe very much in diversification owning 68 00:03:28,919 --> 00:03:31,200 Speaker 2: the full market. It is very tough to pick the 69 00:03:31,320 --> 00:03:33,440 Speaker 2: individual stocks. When we talk about stocks for a long 70 00:03:33,480 --> 00:03:36,640 Speaker 2: one you can have long term losers, but when you 71 00:03:36,680 --> 00:03:40,720 Speaker 2: buy a broad market portfolio, you're getting that diversification. The 72 00:03:40,720 --> 00:03:43,080 Speaker 2: winners tend to rise to the top over time. It 73 00:03:43,120 --> 00:03:46,280 Speaker 2: renews all the time. And you know, owning the market cheaply. 74 00:03:46,320 --> 00:03:48,480 Speaker 2: You can do that now much more than ever before, 75 00:03:48,640 --> 00:03:50,160 Speaker 2: which one of reason why you could pay more for 76 00:03:50,200 --> 00:03:52,160 Speaker 2: the market than you did Historically it was much harder 77 00:03:52,200 --> 00:03:53,960 Speaker 2: to get diversification than you can today. 78 00:03:54,360 --> 00:03:57,600 Speaker 1: So we've talked about sixty six to eighty two, twenty 79 00:03:57,760 --> 00:04:01,440 Speaker 1: one to twenty thirteen, equities did poorly. More recently the 80 00:04:01,480 --> 00:04:03,760 Speaker 1: first quarter of twenty and then pretty much all at 81 00:04:03,760 --> 00:04:07,839 Speaker 1: twenty twenty two, stocks did poorly. What should investors do 82 00:04:08,360 --> 00:04:10,360 Speaker 1: when equities are in a bear market? 83 00:04:10,640 --> 00:04:12,400 Speaker 2: Often when you're in a bear market, it's a good 84 00:04:12,440 --> 00:04:15,040 Speaker 2: time to be thinking about adding to allocations versus selling 85 00:04:15,040 --> 00:04:17,880 Speaker 2: from allocations. You got to think about the real long 86 00:04:17,960 --> 00:04:20,800 Speaker 2: term probability of when do you lose. We often look 87 00:04:20,839 --> 00:04:23,240 Speaker 2: at stocks versus T bills just as a simple way 88 00:04:23,279 --> 00:04:25,640 Speaker 2: of doing that. And you know, two thirds of the 89 00:04:25,680 --> 00:04:28,520 Speaker 2: time stocks do better than cash. You know, one third 90 00:04:28,520 --> 00:04:31,480 Speaker 2: of the time you'll have stocks losing to cash. You know, 91 00:04:31,720 --> 00:04:33,440 Speaker 2: the cash today is five percent so people say, is 92 00:04:33,480 --> 00:04:35,719 Speaker 2: that now it's time to be thinking about those cash rates. 93 00:04:36,160 --> 00:04:38,120 Speaker 2: But when you zoom out, you go from one year 94 00:04:38,160 --> 00:04:40,599 Speaker 2: to five years, the odds of success for stocks go 95 00:04:40,640 --> 00:04:43,279 Speaker 2: up to seventy five percent. You zoom out to ten years, 96 00:04:43,320 --> 00:04:46,720 Speaker 2: it's like eighty five percent, and twenty years is ninety 97 00:04:46,800 --> 00:04:49,000 Speaker 2: nine percent of the time to stop just about always 98 00:04:49,120 --> 00:04:52,719 Speaker 2: almost always. So we do say look at the long term. Yes, 99 00:04:52,800 --> 00:04:55,280 Speaker 2: you can have painful periods, but you got to think 100 00:04:55,320 --> 00:04:57,679 Speaker 2: back to that long term opportunity of stocks versus cash. 101 00:04:57,839 --> 00:05:01,600 Speaker 1: So let's talk about volatility and raw downs. People tend 102 00:05:01,680 --> 00:05:04,960 Speaker 1: to get nervous when the market is in the red. 103 00:05:05,560 --> 00:05:08,280 Speaker 1: What do you think about dollar cost averaging or other 104 00:05:08,480 --> 00:05:12,560 Speaker 1: approaches when stocks are in what might be a three 105 00:05:12,600 --> 00:05:14,440 Speaker 1: to five a seven year bear market. 106 00:05:14,680 --> 00:05:16,520 Speaker 2: If we're coming off with the holiday season, we had 107 00:05:16,560 --> 00:05:20,120 Speaker 2: the Black Friday sales, Cyber Monday sales. You see prices 108 00:05:20,160 --> 00:05:22,360 Speaker 2: go down, you get excited, and you go buy. That's 109 00:05:22,440 --> 00:05:25,200 Speaker 2: really what you need to think about with stocks. They 110 00:05:25,200 --> 00:05:27,240 Speaker 2: go on sale and you want to take the opportunity 111 00:05:27,279 --> 00:05:30,000 Speaker 2: to buy. You don't want to be selling at those 112 00:05:30,200 --> 00:05:34,360 Speaker 2: very panic type sales. One of Professor Siegl's good friends 113 00:05:34,360 --> 00:05:37,679 Speaker 2: Bob Schiller wrote, irrational exuberance. You get to these periods 114 00:05:37,720 --> 00:05:41,479 Speaker 2: of irrational disc exuberance where people get overly pessimistic about 115 00:05:41,520 --> 00:05:43,080 Speaker 2: what's ahead, and those are the times to be thinking 116 00:05:43,120 --> 00:05:44,280 Speaker 2: about adding to your portfolio. 117 00:05:44,320 --> 00:05:46,960 Speaker 1: We were talking about this in the office, especially for 118 00:05:47,080 --> 00:05:51,440 Speaker 1: younger people under forty, under thirty, when markets pull back, 119 00:05:51,960 --> 00:05:54,359 Speaker 1: they shouldn't be dour about it. They have a thirty 120 00:05:54,400 --> 00:05:57,760 Speaker 1: or a forty year investment horizon. When if you're young 121 00:05:57,800 --> 00:06:00,080 Speaker 1: and markets are in a sell off, shouldn't you be 122 00:06:00,120 --> 00:06:02,400 Speaker 1: more aggressive at that point buying more equities? Oh? 123 00:06:02,440 --> 00:06:04,320 Speaker 2: For sure. I mean it's hard in that moment you 124 00:06:04,360 --> 00:06:06,840 Speaker 2: see the prices going down and you start thinking the 125 00:06:06,839 --> 00:06:09,599 Speaker 2: world's going to end, and people panic react. But that 126 00:06:09,760 --> 00:06:11,479 Speaker 2: is the time when we think you should be adding. 127 00:06:11,680 --> 00:06:14,880 Speaker 1: So what about other periods where we see equities underperforming 128 00:06:14,920 --> 00:06:19,320 Speaker 1: a specific asset class, precious metals or gold, How should 129 00:06:19,400 --> 00:06:20,719 Speaker 1: investor be thinking about that? 130 00:06:21,240 --> 00:06:23,240 Speaker 2: Gold has been one of those ideas of it's an 131 00:06:23,279 --> 00:06:26,000 Speaker 2: inflation hedge. It has kept up in segols two hundred 132 00:06:26,080 --> 00:06:28,720 Speaker 2: years of data. It has kept up with inflation but 133 00:06:28,839 --> 00:06:31,680 Speaker 2: delivered less than one percent a year over the last 134 00:06:31,680 --> 00:06:33,599 Speaker 2: two hundred years. So it's been a good inflation hedge. 135 00:06:33,600 --> 00:06:35,960 Speaker 2: You kept up, but not much more when stocks did 136 00:06:36,040 --> 00:06:38,400 Speaker 2: six percent on top of inflation. So I think the 137 00:06:38,839 --> 00:06:41,520 Speaker 2: hardest challenge is you could say, yes, I'm worried about inflation. 138 00:06:41,640 --> 00:06:44,640 Speaker 2: Gold something to look at. We've done some things at 139 00:06:44,680 --> 00:06:47,320 Speaker 2: Wisdom Tree, looking at capital FISHI and investing where we 140 00:06:47,400 --> 00:06:50,800 Speaker 2: stack like gold on top of stocks where you can 141 00:06:50,839 --> 00:06:52,839 Speaker 2: get both of them without having to sell your stocks 142 00:06:52,839 --> 00:06:54,360 Speaker 2: to buy gold. I think that's one of the ways 143 00:06:54,400 --> 00:06:57,560 Speaker 2: to think about gold. But over very long term periods, 144 00:06:57,800 --> 00:07:00,479 Speaker 2: stocks have been better long termculation of wealth. 145 00:07:00,880 --> 00:07:04,680 Speaker 1: How should investors think about black swans events like the 146 00:07:04,720 --> 00:07:08,039 Speaker 1: pandemic or the Great Financial Crisis? What should they be 147 00:07:08,160 --> 00:07:10,800 Speaker 1: doing during these panicky selloffs? 148 00:07:11,120 --> 00:07:14,080 Speaker 2: Risk always exists. We've been living with these types of 149 00:07:14,160 --> 00:07:16,840 Speaker 2: risks for throughout all time. I mean, they do seem 150 00:07:16,880 --> 00:07:19,480 Speaker 2: to be more present in our minds today. Even just 151 00:07:19,560 --> 00:07:22,160 Speaker 2: the recent Tamas attack on Israel. Has you worried about 152 00:07:22,160 --> 00:07:24,000 Speaker 2: what's going to happen around the world and they are 153 00:07:24,040 --> 00:07:25,560 Speaker 2: they going to bring it to the US and all 154 00:07:25,600 --> 00:07:28,320 Speaker 2: sorts of questions that these things always are there, They're 155 00:07:28,320 --> 00:07:30,720 Speaker 2: in the background. But that's one of the things that 156 00:07:30,840 --> 00:07:34,320 Speaker 2: gives stocks a risk premium. Their premium returns because they 157 00:07:34,320 --> 00:07:37,160 Speaker 2: have risk. If you didn't have risk just being t bills, 158 00:07:37,240 --> 00:07:39,240 Speaker 2: but then you don't get compensated for that risk that 159 00:07:39,280 --> 00:07:39,880 Speaker 2: you're taking. 160 00:07:39,960 --> 00:07:42,720 Speaker 1: So you mentioned professor Bob Schiller, who's done a lot 161 00:07:42,800 --> 00:07:47,520 Speaker 1: of work with expected returns. How should investors think about 162 00:07:47,600 --> 00:07:51,360 Speaker 1: equities when valuations are a little elevated. 163 00:07:51,720 --> 00:07:55,280 Speaker 2: It's absolutely true stocks are more expensive than their history, 164 00:07:55,560 --> 00:07:58,080 Speaker 2: but it's also true that bonds are more expensive than 165 00:07:58,120 --> 00:08:00,120 Speaker 2: their history. So people say, again, I get five two 166 00:08:00,120 --> 00:08:03,200 Speaker 2: percent and risk free treasuries. Should that lower the case 167 00:08:03,240 --> 00:08:06,640 Speaker 2: for stocks? That's the short term rate. You know, you 168 00:08:06,680 --> 00:08:09,240 Speaker 2: got to look at tips yields. Tips are those inflation 169 00:08:09,280 --> 00:08:12,480 Speaker 2: protected securities. The ten year tips are right around two percent. 170 00:08:12,560 --> 00:08:17,080 Speaker 2: Today you look at stocks, PE's below twenty called eighteen 171 00:08:17,120 --> 00:08:19,960 Speaker 2: to nineteen forward pes. That's giving you a five to 172 00:08:20,040 --> 00:08:23,360 Speaker 2: six percent earning yield. So the equity premium of stocks 173 00:08:23,440 --> 00:08:26,720 Speaker 2: versus tips is above three percent, which is exactly the 174 00:08:26,760 --> 00:08:29,240 Speaker 2: same as seguals. Two hundred years of data, there was 175 00:08:29,280 --> 00:08:31,640 Speaker 2: a three percent equity premium. It was around three and 176 00:08:31,640 --> 00:08:33,720 Speaker 2: a half percent for bonds, a little bit over six 177 00:08:33,760 --> 00:08:37,040 Speaker 2: and a half for stocks. Today, bonds are two. You're 178 00:08:37,040 --> 00:08:38,960 Speaker 2: getting more than five in stocks if we look again 179 00:08:39,040 --> 00:08:41,600 Speaker 2: seven to ten years out, and so they're not expensive 180 00:08:41,600 --> 00:08:45,160 Speaker 2: by historical standards on an equity premium basis over stocks 181 00:08:45,240 --> 00:08:48,080 Speaker 2: versus bonds, and so yes, they're both lower than their 182 00:08:48,160 --> 00:08:51,720 Speaker 2: two hundred Yer data, but it's reasonable equity risk premium today. 183 00:08:51,960 --> 00:08:55,440 Speaker 1: So what are the biggest challenges to staying invested for 184 00:08:55,520 --> 00:08:57,200 Speaker 1: the long run in equities? 185 00:08:57,520 --> 00:09:00,280 Speaker 2: It is really that short term volatility and the sort 186 00:09:00,320 --> 00:09:03,720 Speaker 2: of panic moments of all sorts of these risks that 187 00:09:03,800 --> 00:09:06,160 Speaker 2: come up last few years has been fed in inflation. 188 00:09:06,320 --> 00:09:08,240 Speaker 2: Now it's geopolitics. I think it's going to be more 189 00:09:08,280 --> 00:09:11,000 Speaker 2: about geopolitics over the next twelve months, and it is 190 00:09:11,000 --> 00:09:13,240 Speaker 2: the Fed. The Fed we think is sort of rearview 191 00:09:13,280 --> 00:09:16,319 Speaker 2: mirror and they're on their way towards loosening policy. It's 192 00:09:16,360 --> 00:09:19,920 Speaker 2: now all about what's happening on the world stage. But 193 00:09:20,000 --> 00:09:22,240 Speaker 2: that's noise in the short run that will create a 194 00:09:22,280 --> 00:09:25,040 Speaker 2: lot of volatility, But over the long run, you look 195 00:09:25,080 --> 00:09:28,400 Speaker 2: at that long term compounding of six percent real after 196 00:09:28,440 --> 00:09:30,080 Speaker 2: inflation returns is what we come back to. 197 00:09:30,520 --> 00:09:33,040 Speaker 1: So to wrap up, investors who have a long term 198 00:09:33,120 --> 00:09:36,720 Speaker 1: time horizon, and let's define that as ten or even 199 00:09:36,760 --> 00:09:41,320 Speaker 1: better twenty years, should own a diversified portfolio of equities 200 00:09:41,640 --> 00:09:45,600 Speaker 1: the caveat They should expect volatility and the occasional draw down, 201 00:09:46,000 --> 00:09:48,840 Speaker 1: even a market crash now and again, it's all part 202 00:09:48,840 --> 00:09:53,000 Speaker 1: of the process. Long term investors understand that they get 203 00:09:53,120 --> 00:09:57,800 Speaker 1: paid to hold equities through uncomfortable periods. If it was easy, 204 00:09:58,360 --> 00:10:06,120 Speaker 1: everybody would be rich. You can listen to At the 205 00:10:06,160 --> 00:10:09,600 Speaker 1: Money every week finding in our Master's and business feed 206 00:10:09,800 --> 00:10:13,160 Speaker 1: at Apple Podcasts. Each week we'll be here to discuss 207 00:10:13,240 --> 00:10:16,239 Speaker 1: the issues that matter most to you as an infestor. 208 00:10:16,600 --> 00:10:19,680 Speaker 1: I'm Barry Rittolts. You've been listening to At the Money 209 00:10:19,920 --> 00:10:21,080 Speaker 1: on Bloomberg Radio.