WEBVTT - At the Money: This Is Why Stocks Perform Best

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<v Speaker 1>Stocks have outperformed every other asset class over the long run,

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<v Speaker 1>assuming you measure the long run at about twenty plus

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<v Speaker 1>years real estate, gold bonds. It's hard to find anything

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<v Speaker 1>that has a track record as good as equities since

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<v Speaker 1>the late nineteenth century. The challenge stocks can be risky,

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<v Speaker 1>even voladal over long periods of time, and there are

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<v Speaker 1>so many different approaches to investing that it can get confusing.

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<v Speaker 1>But as it turns out, there are some ways you

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<v Speaker 1>can take advantage of equities as an asset class that

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<v Speaker 1>work well.

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<v Speaker 2>If you're a.

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<v Speaker 1>Long term investor.

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<v Speaker 2>We'll find that.

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<v Speaker 1>I'm Barry Redults and on today's At the Money, we're

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<v Speaker 1>going to discuss how to use equities in your portfolio

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<v Speaker 1>for the long run. To help us unpack all of

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<v Speaker 1>this and what it means for your investing, let's bring

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<v Speaker 1>in Jeremy Schwartz. He's the global chief investment officer at

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<v Speaker 1>Wisdom Tree Asset Management and the longtime collaborator with Wharton

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<v Speaker 1>professor Jeremy Siegel, whose book Stocks for the Long Run

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<v Speaker 1>has become an investing classic. So Jeremy, let's start with

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<v Speaker 1>the basics. What does the historical data say about stocks?

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<v Speaker 2>Well, your intro hit it exactly perfectly. It has been

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<v Speaker 2>the best long term return vehicle. Now, you know, today's

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<v Speaker 2>a time we're all thinking about inflation. We've had very

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<v Speaker 2>high inflation, and this is where people say, well, does

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<v Speaker 2>inflation change the case for stocks? And you know, is

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<v Speaker 2>higher inflation a risk to stocks thesis? And we say,

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<v Speaker 2>you know, stocks are not just a good hedge for inflation,

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<v Speaker 2>they're the best hedge for infort right.

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<v Speaker 1>If revenue goes up, if profits go up, stock prices

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<v Speaker 1>are going.

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<v Speaker 2>To go up.

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<v Speaker 1>Yeah.

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<v Speaker 2>Over the very long term, you see stocks have done

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<v Speaker 2>in Siegel's dat he had his two hundred years plus

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<v Speaker 2>of returns across stocks, bonds, bills, gold, the dollar or

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<v Speaker 2>you had six and a half to seven percent over

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<v Speaker 2>all long term time periods above inflation. Okay, and that

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<v Speaker 2>was a stable return. We could talk about factors that

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<v Speaker 2>change that looking forward, but you know, six seven above

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<v Speaker 2>inflation with a pretty smooth line. Nothing had that same

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<v Speaker 2>stability of constant real returns over time.

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<v Speaker 1>So we're talking about the long run. How do you

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<v Speaker 1>define the long run? What is the sort of holding

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<v Speaker 1>period that investors should think about if they want to

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<v Speaker 1>get all of those benefits?

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<v Speaker 2>We tend to think of seven to ten years as

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<v Speaker 2>a good forward looking indicator. There are periods where stocks

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<v Speaker 2>can go down. The longest period we had in our

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<v Speaker 2>data was seventeen years of losses of persing power, so

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<v Speaker 2>after inflation, persing.

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<v Speaker 1>Power eighty six to eighty two was exalting.

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<v Speaker 2>Yeah, and that was exactly around that time. And you know,

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<v Speaker 2>bonds had a double that time period, so they had

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<v Speaker 2>a thirty five year period where it had negative real returns.

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<v Speaker 2>You didn't have TIPS bonds back in the day. Tips

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<v Speaker 2>are treasury inflation technive securities that get an adjustment for inflation.

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<v Speaker 2>So the primary risk to bonds was that inflationary period.

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<v Speaker 2>But you actually had negative TIPS yields not too long ago,

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<v Speaker 2>just before this recent increase in rates, eighteen months ago,

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<v Speaker 2>you had negative yields.

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<v Speaker 1>You know, So if I'm a long term investor, if

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<v Speaker 1>I'm going to hold on to my portfolio for ten

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<v Speaker 1>or even better twenty years, what are the best strategies

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<v Speaker 1>to use to capture those returns?

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<v Speaker 2>You know, we do believe very much in diversification owning

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<v Speaker 2>the full market. It is very tough to pick the

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<v Speaker 2>individual stocks. When we talk about stocks for a long

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<v Speaker 2>one you can have long term losers, but when you

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<v Speaker 2>buy a broad market portfolio, you're getting that diversification. The

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<v Speaker 2>winners tend to rise to the top over time. It

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<v Speaker 2>renews all the time. And you know, owning the market cheaply.

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<v Speaker 2>You can do that now much more than ever before,

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<v Speaker 2>which one of reason why you could pay more for

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<v Speaker 2>the market than you did Historically it was much harder

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<v Speaker 2>to get diversification than you can today.

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<v Speaker 1>So we've talked about sixty six to eighty two, twenty

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<v Speaker 1>one to twenty thirteen, equities did poorly. More recently the

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<v Speaker 1>first quarter of twenty and then pretty much all at

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<v Speaker 1>twenty twenty two, stocks did poorly. What should investors do

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<v Speaker 1>when equities are in a bear market?

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<v Speaker 2>Often when you're in a bear market, it's a good

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<v Speaker 2>time to be thinking about adding to allocations versus selling

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<v Speaker 2>from allocations. You got to think about the real long

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<v Speaker 2>term probability of when do you lose. We often look

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<v Speaker 2>at stocks versus T bills just as a simple way

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<v Speaker 2>of doing that. And you know, two thirds of the

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<v Speaker 2>time stocks do better than cash. You know, one third

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<v Speaker 2>of the time you'll have stocks losing to cash. You know,

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<v Speaker 2>the cash today is five percent so people say, is

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<v Speaker 2>that now it's time to be thinking about those cash rates.

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<v Speaker 2>But when you zoom out, you go from one year

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<v Speaker 2>to five years, the odds of success for stocks go

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<v Speaker 2>up to seventy five percent. You zoom out to ten years,

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<v Speaker 2>it's like eighty five percent, and twenty years is ninety

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<v Speaker 2>nine percent of the time to stop just about always

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<v Speaker 2>almost always. So we do say look at the long term. Yes,

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<v Speaker 2>you can have painful periods, but you got to think

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<v Speaker 2>back to that long term opportunity of stocks versus cash.

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<v Speaker 1>So let's talk about volatility and raw downs. People tend

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<v Speaker 1>to get nervous when the market is in the red.

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<v Speaker 1>What do you think about dollar cost averaging or other

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<v Speaker 1>approaches when stocks are in what might be a three

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<v Speaker 1>to five a seven year bear market.

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<v Speaker 2>If we're coming off with the holiday season, we had

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<v Speaker 2>the Black Friday sales, Cyber Monday sales. You see prices

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<v Speaker 2>go down, you get excited, and you go buy. That's

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<v Speaker 2>really what you need to think about with stocks. They

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<v Speaker 2>go on sale and you want to take the opportunity

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<v Speaker 2>to buy. You don't want to be selling at those

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<v Speaker 2>very panic type sales. One of Professor Siegl's good friends

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<v Speaker 2>Bob Schiller wrote, irrational exuberance. You get to these periods

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<v Speaker 2>of irrational disc exuberance where people get overly pessimistic about

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<v Speaker 2>what's ahead, and those are the times to be thinking

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<v Speaker 2>about adding to your portfolio.

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<v Speaker 1>We were talking about this in the office, especially for

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<v Speaker 1>younger people under forty, under thirty, when markets pull back,

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<v Speaker 1>they shouldn't be dour about it. They have a thirty

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<v Speaker 1>or a forty year investment horizon. When if you're young

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<v Speaker 1>and markets are in a sell off, shouldn't you be

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<v Speaker 1>more aggressive at that point buying more equities? Oh?

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<v Speaker 2>For sure. I mean it's hard in that moment you

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<v Speaker 2>see the prices going down and you start thinking the

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<v Speaker 2>world's going to end, and people panic react. But that

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<v Speaker 2>is the time when we think you should be adding.

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<v Speaker 1>So what about other periods where we see equities underperforming

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<v Speaker 1>a specific asset class, precious metals or gold, How should

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<v Speaker 1>investor be thinking about that?

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<v Speaker 2>Gold has been one of those ideas of it's an

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<v Speaker 2>inflation hedge. It has kept up in segols two hundred

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<v Speaker 2>years of data. It has kept up with inflation but

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<v Speaker 2>delivered less than one percent a year over the last

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<v Speaker 2>two hundred years. So it's been a good inflation hedge.

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<v Speaker 2>You kept up, but not much more when stocks did

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<v Speaker 2>six percent on top of inflation. So I think the

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<v Speaker 2>hardest challenge is you could say, yes, I'm worried about inflation.

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<v Speaker 2>Gold something to look at. We've done some things at

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<v Speaker 2>Wisdom Tree, looking at capital FISHI and investing where we

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<v Speaker 2>stack like gold on top of stocks where you can

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<v Speaker 2>get both of them without having to sell your stocks

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<v Speaker 2>to buy gold. I think that's one of the ways

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<v Speaker 2>to think about gold. But over very long term periods,

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<v Speaker 2>stocks have been better long termculation of wealth.

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<v Speaker 1>How should investors think about black swans events like the

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<v Speaker 1>pandemic or the Great Financial Crisis? What should they be

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<v Speaker 1>doing during these panicky selloffs?

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<v Speaker 2>Risk always exists. We've been living with these types of

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<v Speaker 2>risks for throughout all time. I mean, they do seem

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<v Speaker 2>to be more present in our minds today. Even just

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<v Speaker 2>the recent Tamas attack on Israel. Has you worried about

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<v Speaker 2>what's going to happen around the world and they are

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<v Speaker 2>they going to bring it to the US and all

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<v Speaker 2>sorts of questions that these things always are there, They're

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<v Speaker 2>in the background. But that's one of the things that

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<v Speaker 2>gives stocks a risk premium. Their premium returns because they

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<v Speaker 2>have risk. If you didn't have risk just being t bills,

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<v Speaker 2>but then you don't get compensated for that risk that

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<v Speaker 2>you're taking.

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<v Speaker 1>So you mentioned professor Bob Schiller, who's done a lot

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<v Speaker 1>of work with expected returns. How should investors think about

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<v Speaker 1>equities when valuations are a little elevated.

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<v Speaker 2>It's absolutely true stocks are more expensive than their history,

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<v Speaker 2>but it's also true that bonds are more expensive than

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<v Speaker 2>their history. So people say, again, I get five two

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<v Speaker 2>percent and risk free treasuries. Should that lower the case

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<v Speaker 2>for stocks? That's the short term rate. You know, you

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<v Speaker 2>got to look at tips yields. Tips are those inflation

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<v Speaker 2>protected securities. The ten year tips are right around two percent.

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<v Speaker 2>Today you look at stocks, PE's below twenty called eighteen

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<v Speaker 2>to nineteen forward pes. That's giving you a five to

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<v Speaker 2>six percent earning yield. So the equity premium of stocks

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<v Speaker 2>versus tips is above three percent, which is exactly the

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<v Speaker 2>same as seguals. Two hundred years of data, there was

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<v Speaker 2>a three percent equity premium. It was around three and

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<v Speaker 2>a half percent for bonds, a little bit over six

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<v Speaker 2>and a half for stocks. Today, bonds are two. You're

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<v Speaker 2>getting more than five in stocks if we look again

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<v Speaker 2>seven to ten years out, and so they're not expensive

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<v Speaker 2>by historical standards on an equity premium basis over stocks

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<v Speaker 2>versus bonds, and so yes, they're both lower than their

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<v Speaker 2>two hundred Yer data, but it's reasonable equity risk premium today.

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<v Speaker 1>So what are the biggest challenges to staying invested for

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<v Speaker 1>the long run in equities?

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<v Speaker 2>It is really that short term volatility and the sort

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<v Speaker 2>of panic moments of all sorts of these risks that

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<v Speaker 2>come up last few years has been fed in inflation.

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<v Speaker 2>Now it's geopolitics. I think it's going to be more

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<v Speaker 2>about geopolitics over the next twelve months, and it is

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<v Speaker 2>the Fed. The Fed we think is sort of rearview

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<v Speaker 2>mirror and they're on their way towards loosening policy. It's

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<v Speaker 2>now all about what's happening on the world stage. But

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<v Speaker 2>that's noise in the short run that will create a

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<v Speaker 2>lot of volatility, But over the long run, you look

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<v Speaker 2>at that long term compounding of six percent real after

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<v Speaker 2>inflation returns is what we come back to.

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<v Speaker 1>So to wrap up, investors who have a long term

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<v Speaker 1>time horizon, and let's define that as ten or even

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<v Speaker 1>better twenty years, should own a diversified portfolio of equities

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<v Speaker 1>the caveat They should expect volatility and the occasional draw down,

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<v Speaker 1>even a market crash now and again, it's all part

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<v Speaker 1>of the process. Long term investors understand that they get

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<v Speaker 1>paid to hold equities through uncomfortable periods. If it was easy,

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<v Speaker 1>everybody would be rich. You can listen to At the

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<v Speaker 1>Money every week finding in our Master's and business feed

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<v Speaker 1>at Apple Podcasts. Each week we'll be here to discuss

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<v Speaker 1>the issues that matter most to you as an infestor.

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<v Speaker 1>I'm Barry Rittolts. You've been listening to At the Money

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<v Speaker 1>on Bloomberg Radio.