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Speaker 1: Stocks have outperformed every other asset class over the long run,

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Speaker 1: assuming you measure the long run at about twenty plus

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

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Speaker 1: that has a track record as good as equities since

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Speaker 1: the late nineteenth century. The challenge stocks can be risky,

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Speaker 1: even viatle over long periods of time, and there are

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Speaker 1: so many different approaches to investing that it can get confusing.

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Speaker 1: But as it turns out, there are some ways you

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Speaker 1: can take advantage of equities as an asset class that

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Speaker 1: work well if you're a long term investors.

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Speaker 2: We'll find out.

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Speaker 1: I'm Barry Rehults and on today's At the Money, we're

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Speaker 1: going to discuss how to use equities in your portfolio

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Speaker 1: for the long run. To help us unpack all of

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Speaker 1: this and what it means for your investing, let's bring

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Speaker 1: in Jeremy Schwartz. He's the global chief investment officer at

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Speaker 1: Wisdom Tree Asset Management and the longtime collaborator with Wharton

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Speaker 1: professor Jeremy Siegel, whose book Stocks for the Long Run

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

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Speaker 1: the basics. What does the historical data say about stocks?

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Speaker 2: Well, your intro hit it exactly perfectly. It has been

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

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

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Speaker 2: high inflation, and this is where people say, well does

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Speaker 2: inflation change the case for stocks? And you know, is

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Speaker 2: higher inflation a risk to stocks thesis? And we say,

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Speaker 2: you know, stocks are not just a good hedge for inflation,

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Speaker 2: they're the best hedge for infort Right.

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Speaker 1: If revenue goes up, if profits go up, stock prices

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Speaker 1: are going to go up.

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Speaker 2: Yeah. Over the very long term, you see stocks have done.

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Speaker 2: In Siegel stat he had his two hundred years plus

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Speaker 2: of returns across stocks, bonds, bills, gold, the dollar. You

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Speaker 2: had six and a half to seven percent over all

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Speaker 2: long term time periods above inflation. Okay, and that was

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Speaker 2: a stable return. We could talk about factors that change

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Speaker 2: that looking forward, but you know, six to seven above

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Speaker 2: inflation with a pretty smooth line. Nothing had that same

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Speaker 2: stability of constant real returns over time.

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Speaker 1: So we're talking about the long run. How do you

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Speaker 1: define the long run? What is the sort of holding

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Speaker 1: period that investors should think about if they want to

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Speaker 1: get all of those benefits.

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Speaker 2: We tend to think of seven to ten years as

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Speaker 2: a good forward looking indicator. There are periods where stocks

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Speaker 2: can go down. The longest period we had in our

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Speaker 2: data was seventeen years of losses of persing power, so

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Speaker 2: after inflation, persing.

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Speaker 1: Powers six to eighty two was exally.

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Speaker 2: Yeah, and that was exactly around that time. And you know,

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Speaker 2: bonds had a double that time period, so they had

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Speaker 2: a thirty five year period where it had negative real returns.

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Speaker 2: You didn't have tips bonds back in the day. Tips

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Speaker 2: are treasury inflation securities that get an adjustment for inflation.

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Speaker 2: So the primary risk to bonds was that inflationary period.

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Speaker 2: But you actually had negative tips yields not so long ago,

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Speaker 2: just before this recent increase in rates, eighteen months ago,

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Speaker 2: you had negative yields.

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Speaker 1: You know, So if I'm a long term investor, if

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Speaker 1: I'm going to hold on to my portfolio for ten

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Speaker 1: or even better twenty years, what are the best strategies

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Speaker 1: to use to capture those returns?

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Speaker 2: You know, we do believe very much in diversification owning

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Speaker 2: the full market. It is very tough to pick the

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Speaker 2: individual stocks. When we talk about stocks for a long

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Speaker 2: one you can have long term losers. But when you

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

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Speaker 2: winners tend to rise to the top over time. It

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Speaker 2: renews all the time. And you know, owning the market cheaply.

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Speaker 2: You can do that now much more than ever before,

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Speaker 2: which one the reason why you could pay more for

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Speaker 2: the market than you did Historically it was much harder

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Speaker 2: to get diversication than you can today.

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Speaker 1: So we've talked about sixty six to eighty two, twenty

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Speaker 1: one to twenty thirteen, equities did poorly. More recently the

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Speaker 1: first quarter of twenty and then pretty much all at

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Speaker 1: twenty twenty two, stocks did poorly. What should investors do

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Speaker 1: when equities are in a bear market?

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Speaker 2: Often when you're in a bear market, it's a good

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Speaker 2: time to be thinking about adding to allocation versus selling

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Speaker 2: from allocations. You got to think about the real long

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Speaker 2: term probability of when do you lose. We often look

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Speaker 2: at stocks versus T bills just as a simple way

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Speaker 2: of doing that. And you know, two thirds of the

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Speaker 2: time stocks do better than cash. You know one third

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Speaker 2: of the time you'll have stocks losing to cash. You

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Speaker 2: know that the cash today is five percent. When people

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Speaker 2: say is that now it's time to be thinking about

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Speaker 2: those cash rates. But when you zoom out, you go

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Speaker 2: from one year to five years, the odds of success

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Speaker 2: for stocks go up to seventy five percent. You zoom

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Speaker 2: out to ten years, it's like eighty five percent, and

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Speaker 2: twenty years is ninety nine percent of the time to

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Speaker 2: stop just about always almost always. So we do say

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Speaker 2: look at the long term. Yes, you could have painful periods,

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Speaker 2: but you got to think back to that long term

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Speaker 2: opportunity of stocks versus cash.

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Speaker 1: So let's talk about volatility and downs. People tend to

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Speaker 1: get nervous when the market is in the red. What

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Speaker 1: do you think about dollar cost averaging or other approaches

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Speaker 1: when stocks are in what might be a three to

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Speaker 1: five a seven year bear market.

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Speaker 2: If we're coming off the holiday season, we had the

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Speaker 2: Black Friday sales, Cyber Monday sales. You see prices go down,

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Speaker 2: you get excited, and you go buy. That's really what

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Speaker 2: you need to think about with stocks. They go on

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Speaker 2: sale and you want to take the opportunity to buy.

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Speaker 2: You don't want to be selling at those very panic

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Speaker 2: type sales. One of Professor Siegel's good friends, Bob Schiller,

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Speaker 2: wrote irrational exuberance. You can get to these periods of

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Speaker 2: irrational disc exuberance where people get overly pessimistic about what's ahead,

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Speaker 2: and those are the times to be thinking about adding

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Speaker 2: to your portfolio.

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Speaker 1: We were talking about this in the office, especially for

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Speaker 1: younger people under forty, under thirty, when markets pull back,

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Speaker 1: they shouldn't be dour about it. They have a thirty

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Speaker 1: or a forty year investment horizon. When if you're young

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Speaker 1: in markets are going to sell off, shouldn't you be

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Speaker 1: more aggressive at that point buying more equities? Oh?

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Speaker 2: For sure. I mean it's hard in that moment you

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Speaker 2: see the prices going down and you start thinking the

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

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Speaker 2: is the times when we think you should be adding.

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Speaker 1: So what about other periods where we see equities underperforming

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Speaker 1: a specific asset class, precious metals or gold, How should

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Speaker 1: investor be thinking about that?

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Speaker 2: Gold has been one of those ideas of it's an

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Speaker 2: inflation hedge. It has kept up in seagols two hundred

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Speaker 2: years of data. It has kept up with inflation but

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Speaker 2: delivered less than one percent a year over the last

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Speaker 2: two hundred years. So it's been a good inflation hedge

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Speaker 2: you kept up, but not much more when stocks did

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Speaker 2: six percent on top of inflation. So I think the

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

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Speaker 2: Gold something to look at. We've done some things at

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Speaker 2: Wisdom Tree, looking at capital fish and investing where we

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Speaker 2: stack like gold on top of stocks, where you can

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Speaker 2: get both of them without having to sell your stocks

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Speaker 2: to buy gold. I think that's one of the ways

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Speaker 2: to think about gold. But over very long term periods,

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Speaker 2: stocks have been better long term eculations wealth.

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Speaker 1: How should investors think about black swans events like the

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Speaker 1: pandemic or the Great Financial Crisis? What should they be

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Speaker 1: doing during these panicky selloffs?

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Speaker 2: Risk always exists. We've been living with these types of

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Speaker 2: risks for throughout all the time. I mean, they do

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Speaker 2: seem to be more present in our minds today. Even

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Speaker 2: just the recent Tamas attack on Israel. Has you worried

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Speaker 2: about what's going to happen around the world and they

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Speaker 2: are they going to bring it to the US and

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Speaker 2: all sorts of questions. These things always are there. They're

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Speaker 2: in the background. But that's one of the things that

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Speaker 2: gives stocks a risk premium. The premium returns because they

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Speaker 2: have risk if you didn't have risk just being t bills,

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Speaker 2: but then you don't get compensated for that risk that

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Speaker 2: you're taking.

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Speaker 1: So you mentioned professor Bob Schiller, who's done a lot

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Speaker 1: of work with expected returns. How should investors think about

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Speaker 1: equities when valuations are a little elevated.

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Speaker 2: It's absolutely true stocks are more expensive than their history,

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Speaker 2: but it's also true that bonds are more expensive than

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Speaker 2: their history. So people say, again, I get five percent

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Speaker 2: and risk free treasuries. Should that lower the case for stocks?

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Speaker 2: That's the short term rate? You know, you got to

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Speaker 2: look at tips yields. Tips are those inflation protected securities.

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Speaker 2: The ten year tips are right around two percent. Today

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Speaker 2: you look at stocks, PE's below twenty called eighteen to

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Speaker 2: nineteen forward pees. That's giving you a five to six

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Speaker 2: percent earning seield. So the equity premium of stocks versus

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Speaker 2: tips is above three percent, which is exactly the same

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Speaker 2: as seguals. Two hundred years of data, there was a

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Speaker 2: three percent equity premium. It was around three and a

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Speaker 2: half percent for bonds, a little bit over six and

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Speaker 2: a half for stocks. Today bonds are two and you're

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Speaker 2: getting more than five in stocks if we look again

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Speaker 2: seven to ten years out, and so they're not expensive

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Speaker 2: by historical standards on an equity premium basis over stocks

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Speaker 2: versus bonds, and so yes, they're both lower than their

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Speaker 2: two hundred year data, but it's reasonable equity risk premium today.

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Speaker 2: So what are the.

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Speaker 1: Biggest challenges to staying invested for the long run in equities?

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Speaker 2: It is really that short term volatility and the sort

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Speaker 2: of panic moments of all sorts of these risks that

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Speaker 2: come up last few years has been fed in inflation.

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Speaker 2: Now it's geopolitics. I think it's going to be more

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Speaker 2: about geopolitics over the next twelve months, and it is

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Speaker 2: the Fed. The Fed we think is sort of rearview

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

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Speaker 2: now all about what's happening on the world stage. But

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Speaker 2: that's noise in the short run that will create a

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Speaker 2: lot of volatility, But over the long run, you look

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Speaker 2: at that long term compounding of six percent real after

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Speaker 2: inflation returns is what we come back to.

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Speaker 1: So to wrap up, investors who have a long term

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Speaker 1: time horizon, and let's define that as ten or even

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Speaker 1: better twenty years should own a diversified portfolio of equities

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Speaker 1: the caveat They should expect volatility and the occasional draw down,

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Speaker 1: even a market crash. Now and again, it's all part

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Speaker 1: of the process. Long term investors understand that they get

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Speaker 1: paid to hold equities through uncomfortable periods. If it was easy,

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Speaker 1: everybody would be rich. You can listen to At the

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Speaker 1: Money every week finding in our master's and business feed

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Speaker 1: at Apple Podcasts. Each week we'll be here to discuss

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Speaker 1: the issues that matter most to you as an infestor.

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Speaker 1: I'm Barry Ritolts. You've been listening to At the Money

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Speaker 1: on Bloomberg Radio