Speaker 1: Stocks have outperformed every other asset class over the long run,
Speaker 1: assuming you measure the long run at about twenty plus
Speaker 1: years real estate, gold bonds. It's hard to find anything
Speaker 1: that has a track record as good as equities since
Speaker 1: the late nineteenth century. The challenge stocks can be risky,
Speaker 1: even voladal over long periods of time, and there are
Speaker 1: so many different approaches to investing that it can get confusing.
Speaker 1: But as it turns out, there are some ways you
Speaker 1: can take advantage of equities as an asset class that
Speaker 1: work well.
Speaker 2: If you're a.
Speaker 1: Long term investor.
Speaker 2: We'll find that.
Speaker 1: I'm Barry Redults and on today's At the Money, we're
Speaker 1: going to discuss how to use equities in your portfolio
Speaker 1: for the long run. To help us unpack all of
Speaker 1: this and what it means for your investing, let's bring
Speaker 1: in Jeremy Schwartz. He's the global chief investment officer at
Speaker 1: Wisdom Tree Asset Management and the longtime collaborator with Wharton
Speaker 1: professor Jeremy Siegel, whose book Stocks for the Long Run
Speaker 1: has become an investing classic. So Jeremy, let's start with
Speaker 1: the basics. What does the historical data say about stocks?
Speaker 2: Well, your intro hit it exactly perfectly. It has been
Speaker 2: the best long term return vehicle. Now, you know, today's
Speaker 2: a time we're all thinking about inflation. We've had very
Speaker 2: high inflation, and this is where people say, well, does
Speaker 2: inflation change the case for stocks? And you know, is
Speaker 2: higher inflation a risk to stocks thesis? And we say,
Speaker 2: you know, stocks are not just a good hedge for inflation,
Speaker 2: they're the best hedge for infort right.
Speaker 1: If revenue goes up, if profits go up, stock prices
Speaker 1: are going.
Speaker 2: To go up.
Speaker 1: Yeah.
Speaker 2: Over the very long term, you see stocks have done
Speaker 2: in Siegel's dat he had his two hundred years plus
Speaker 2: of returns across stocks, bonds, bills, gold, the dollar or
Speaker 2: you had six and a half to seven percent over
Speaker 2: all long term time periods above inflation. Okay, and that
Speaker 2: was a stable return. We could talk about factors that
Speaker 2: change that looking forward, but you know, six seven above
Speaker 2: inflation with a pretty smooth line. Nothing had that same
Speaker 2: stability of constant real returns over time.
Speaker 1: So we're talking about the long run. How do you
Speaker 1: define the long run? What is the sort of holding
Speaker 1: period that investors should think about if they want to
Speaker 1: get all of those benefits?
Speaker 2: We tend to think of seven to ten years as
Speaker 2: a good forward looking indicator. There are periods where stocks
Speaker 2: can go down. The longest period we had in our
Speaker 2: data was seventeen years of losses of persing power, so
Speaker 2: after inflation, persing.
Speaker 1: Power eighty six to eighty two was exalting.
Speaker 2: Yeah, and that was exactly around that time. And you know,
Speaker 2: bonds had a double that time period, so they had
Speaker 2: a thirty five year period where it had negative real returns.
Speaker 2: You didn't have TIPS bonds back in the day. Tips
Speaker 2: are treasury inflation technive securities that get an adjustment for inflation.
Speaker 2: So the primary risk to bonds was that inflationary period.
Speaker 2: But you actually had negative TIPS yields not too long ago,
Speaker 2: just before this recent increase in rates, eighteen months ago,
Speaker 2: you had negative yields.
Speaker 1: You know, So if I'm a long term investor, if
Speaker 1: I'm going to hold on to my portfolio for ten
Speaker 1: or even better twenty years, what are the best strategies
Speaker 1: to use to capture those returns?
Speaker 2: You know, we do believe very much in diversification owning
Speaker 2: the full market. It is very tough to pick the
Speaker 2: individual stocks. When we talk about stocks for a long
Speaker 2: one you can have long term losers, but when you
Speaker 2: buy a broad market portfolio, you're getting that diversification. The
Speaker 2: winners tend to rise to the top over time. It
Speaker 2: renews all the time. And you know, owning the market cheaply.
Speaker 2: You can do that now much more than ever before,
Speaker 2: which one of reason why you could pay more for
Speaker 2: the market than you did Historically it was much harder
Speaker 2: to get diversification than you can today.
Speaker 1: So we've talked about sixty six to eighty two, twenty
Speaker 1: one to twenty thirteen, equities did poorly. More recently the
Speaker 1: first quarter of twenty and then pretty much all at
Speaker 1: twenty twenty two, stocks did poorly. What should investors do
Speaker 1: when equities are in a bear market?
Speaker 2: Often when you're in a bear market, it's a good
Speaker 2: time to be thinking about adding to allocations versus selling
Speaker 2: from allocations. You got to think about the real long
Speaker 2: term probability of when do you lose. We often look
Speaker 2: at stocks versus T bills just as a simple way
Speaker 2: of doing that. And you know, two thirds of the
Speaker 2: time stocks do better than cash. You know, one third
Speaker 2: of the time you'll have stocks losing to cash. You know,
Speaker 2: the cash today is five percent so people say, is
Speaker 2: that now it's time to be thinking about those cash rates.
Speaker 2: But when you zoom out, you go from one year
Speaker 2: to five years, the odds of success for stocks go
Speaker 2: up to seventy five percent. You zoom out to ten years,
Speaker 2: it's like eighty five percent, and twenty years is ninety
Speaker 2: nine percent of the time to stop just about always
Speaker 2: almost always. So we do say look at the long term. Yes,
Speaker 2: you can have painful periods, but you got to think
Speaker 2: back to that long term opportunity of stocks versus cash.
Speaker 1: So let's talk about volatility and raw downs. People tend
Speaker 1: to get nervous when the market is in the red.
Speaker 1: What do you think about dollar cost averaging or other
Speaker 1: approaches when stocks are in what might be a three
Speaker 1: to five a seven year bear market.
Speaker 2: If we're coming off with the holiday season, we had
Speaker 2: the Black Friday sales, Cyber Monday sales. You see prices
Speaker 2: go down, you get excited, and you go buy. That's
Speaker 2: really what you need to think about with stocks. They
Speaker 2: go on sale and you want to take the opportunity
Speaker 2: to buy. You don't want to be selling at those
Speaker 2: very panic type sales. One of Professor Siegl's good friends
Speaker 2: Bob Schiller wrote, irrational exuberance. You get to these periods
Speaker 2: of irrational disc exuberance where people get overly pessimistic about
Speaker 2: what's ahead, and those are the times to be thinking
Speaker 2: about adding to your portfolio.
Speaker 1: We were talking about this in the office, especially for
Speaker 1: younger people under forty, under thirty, when markets pull back,
Speaker 1: they shouldn't be dour about it. They have a thirty
Speaker 1: or a forty year investment horizon. When if you're young
Speaker 1: and markets are in a sell off, shouldn't you be
Speaker 1: more aggressive at that point buying more equities? Oh?
Speaker 2: For sure. I mean it's hard in that moment you
Speaker 2: see the prices going down and you start thinking the
Speaker 2: world's going to end, and people panic react. But that
Speaker 2: is the time when we think you should be adding.
Speaker 1: So what about other periods where we see equities underperforming
Speaker 1: a specific asset class, precious metals or gold, How should
Speaker 1: investor be thinking about that?
Speaker 2: Gold has been one of those ideas of it's an
Speaker 2: inflation hedge. It has kept up in segols two hundred
Speaker 2: years of data. It has kept up with inflation but
Speaker 2: delivered less than one percent a year over the last
Speaker 2: two hundred years. So it's been a good inflation hedge.
Speaker 2: You kept up, but not much more when stocks did
Speaker 2: six percent on top of inflation. So I think the
Speaker 2: hardest challenge is you could say, yes, I'm worried about inflation.
Speaker 2: Gold something to look at. We've done some things at
Speaker 2: Wisdom Tree, looking at capital FISHI and investing where we
Speaker 2: stack like gold on top of stocks where you can
Speaker 2: get both of them without having to sell your stocks
Speaker 2: to buy gold. I think that's one of the ways
Speaker 2: to think about gold. But over very long term periods,
Speaker 2: stocks have been better long termculation of wealth.
Speaker 1: How should investors think about black swans events like the
Speaker 1: pandemic or the Great Financial Crisis? What should they be
Speaker 1: doing during these panicky selloffs?
Speaker 2: Risk always exists. We've been living with these types of
Speaker 2: risks for throughout all time. I mean, they do seem
Speaker 2: to be more present in our minds today. Even just
Speaker 2: the recent Tamas attack on Israel. Has you worried about
Speaker 2: what's going to happen around the world and they are
Speaker 2: they going to bring it to the US and all
Speaker 2: sorts of questions that these things always are there, They're
Speaker 2: in the background. But that's one of the things that
Speaker 2: gives stocks a risk premium. Their premium returns because they
Speaker 2: have risk. If you didn't have risk just being t bills,
Speaker 2: but then you don't get compensated for that risk that
Speaker 2: you're taking.
Speaker 1: So you mentioned professor Bob Schiller, who's done a lot
Speaker 1: of work with expected returns. How should investors think about
Speaker 1: equities when valuations are a little elevated.
Speaker 2: It's absolutely true stocks are more expensive than their history,
Speaker 2: but it's also true that bonds are more expensive than
Speaker 2: their history. So people say, again, I get five two
Speaker 2: percent and risk free treasuries. Should that lower the case
Speaker 2: for stocks? That's the short term rate. You know, you
Speaker 2: got to look at tips yields. Tips are those inflation
Speaker 2: protected securities. The ten year tips are right around two percent.
Speaker 2: Today you look at stocks, PE's below twenty called eighteen
Speaker 2: to nineteen forward pes. That's giving you a five to
Speaker 2: six percent earning yield. So the equity premium of stocks
Speaker 2: versus tips is above three percent, which is exactly the
Speaker 2: same as seguals. Two hundred years of data, there was
Speaker 2: a three percent equity premium. It was around three and
Speaker 2: a half percent for bonds, a little bit over six
Speaker 2: and a half for stocks. Today, bonds are two. You're
Speaker 2: getting more than five in stocks if we look again
Speaker 2: seven to ten years out, and so they're not expensive
Speaker 2: by historical standards on an equity premium basis over stocks
Speaker 2: versus bonds, and so yes, they're both lower than their
Speaker 2: two hundred Yer data, but it's reasonable equity risk premium today.
Speaker 1: So what are the biggest challenges to staying invested for
Speaker 1: the long run in equities?
Speaker 2: It is really that short term volatility and the sort
Speaker 2: of panic moments of all sorts of these risks that
Speaker 2: come up last few years has been fed in inflation.
Speaker 2: Now it's geopolitics. I think it's going to be more
Speaker 2: about geopolitics over the next twelve months, and it is
Speaker 2: the Fed. The Fed we think is sort of rearview
Speaker 2: mirror and they're on their way towards loosening policy. It's
Speaker 2: now all about what's happening on the world stage. But
Speaker 2: that's noise in the short run that will create a
Speaker 2: lot of volatility, But over the long run, you look
Speaker 2: at that long term compounding of six percent real after
Speaker 2: inflation returns is what we come back to.
Speaker 1: So to wrap up, investors who have a long term
Speaker 1: time horizon, and let's define that as ten or even
Speaker 1: better twenty years, should own a diversified portfolio of equities
Speaker 1: the caveat They should expect volatility and the occasional draw down,
Speaker 1: even a market crash now and again, it's all part
Speaker 1: of the process. Long term investors understand that they get
Speaker 1: paid to hold equities through uncomfortable periods. If it was easy,
Speaker 1: everybody would be rich. You can listen to At the
Speaker 1: Money every week finding in our Master's and business feed
Speaker 1: at Apple Podcasts. Each week we'll be here to discuss
Speaker 1: the issues that matter most to you as an infestor.
Speaker 1: I'm Barry Rittolts. You've been listening to At the Money
Speaker 1: on Bloomberg Radio.