Posts tagged ‘bonds’
Siegel Digs in Heels on Stocks
Jeremy Siegel, Wharton University Professor and author of Stocks for the Long Run, is defending his long-term thesis that stocks will outperform bonds over the long-run. Mr. Siegel in his latest Financial Times article vigorously defends his optimistic equity belief despite recent questions regarding the validity and accuracy of his long-term data (see my earlier article).
He acknowledges the -3.15% return of U.S. stock performance over the last decade (the fourth worst period since 1871), so what gives him confidence in stocks now? Let’s take a peek on why Siegel is digging in his heels:
Since 1871, the three worst ten-year returns for stocks have ended in the years 1974, 1920, and 1978. These were followed, respectively, by real, after-inflation stock returns of more than 8 per cent, 13 per cent, and 9 per cent over next ten years. In fact for the 13 ten-year periods of negative returns stocks have suffered since 1871, the next ten years gave investors real returns that averaged over 10 per cent per year. This return has far exceeded the average 6.66 per cent real return in all ten years periods, and is twice the return offered by long-term government bonds.
Siegel’s bullish stock stance has also been attacked by Robert Arnott, Chairman of Research Affiliates, when he noted a certain bond strategy bested stocks over the last 40 years. Here’s what Mr. Siegel has to say about stock versus bond performance:
Even with the recent bear market factored in, stocks have always done better than Treasury bonds over every 30-year period since 1871. And over 20-year periods, stocks bested Treasuries in all but about 5 per cent of the cases… In fact, with the recent stock market recovery and bond market decline, stock returns now handily outpace bond returns over the past 30 and 40 years.
If you’re 50, 60, or older, then Siegel’s time horizons may not fit into your plans. Nonetheless, in any game one chooses to play (including the game of money), I, like many, prefer to have the odds stacked in my favor.
In addressing the skeptics, such as Bill Gross who believes the U.S. is entering a “New Normal” phase of sluggish growth, Mr. Siegel notes this commentary even if true does not account for the faster pace of international growth – Siegel goes on to explain that the S&P 500 corporations garner almost 50% of revenues from these faster growing areas outside the U.S.
On the subject of valuation, Mr. Siegel highlights the market is trading at roughly 14x’s 2010 estimates, well below the 18-20x multiples usually associated with low-interest rate periods like these.
In periods of extreme volatility (upwards or downwards), the prevailing beliefs fight reversion to the mean arguments because trend followers believe “this time is different.” Just think of the cab drivers who were buying tech stocks in the late 1990s, or of the neighbor buying rental real estate in 2006. Bill Gross with his “New Normal” doesn’t buy the reversion argument either. Time will tell if we have entered a new challenging era like Mr. Gross sees? Regardless, Professor Siegel will be digging in his heels as he invests in stocks for the long run.
Read the Whole Financial Times Article Written by Professor Siegel
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
Treasury Bubble Hasn’t Burst….Yet
10-Year Treasury Chart (5-14-09)
Clusterstlock’s Joe Weisenthal’s takes a historical look on 10-year Treasury yields going back to 1962. As you can see, the yield is still below 1962 levels, despite the massive inflationary steps the Federal Reserve and Treasury have taken over the last 18 months (6-26-09 yield was 3.51%). These trends can also be put into perspective by reading Vincent Fernando’s post at http://www.researchreloaded.com. Take a peek.
Ways to take advantage of this trend include purchases of TBT (UltraShort 20+ Year Treasury ProShares) or short TLT (iShares Barclays 20+ Year Treasury Bond)*.
Reverse View of Historical 10-Year Treasury Yield
*Disclosure: Sidoxia Capital Management clients and/or Slome Sidoxia Fund may have a short position in TLT.
“Bill, Say It Ain’t So…”
Bond guru and Newport Beach neighbor, Bill Gross, is out with his entertaining monthly PIMCO piece (Click Here). Try to keep a box of tissues close by in case you cry during the read. His views support my stance on short duration bonds and TIPs (Treasury Inflation Protected Securities), but big Bill would NEVER stand to root for equities – especially after his call for Dow 5000 a while back.
In this CNBC piece, he points out the obvious troubles we face from all the debt we’re choking on. As a country, we need the “Heimlich Maneuver!”
"Save to Your Grave"
Building Your Financial Future – Mistakes Made in Investment Planning
Building Your Dream Future Requires a Plan
Building your retirement and financial future can be likened with the challenge of designing and building your dream home. The tools and strategies selected will determine the ultimate cost and outcome of the project.
I constantly get asked by investors, “Wade, is this the bottom – is now the right time to get in the markets?” First of all, if I precisely knew the answer, I would buy my own island and drink coconut-umbrella drinks all day. And secondarily, despite the desire for a simple, get-rich quick answer, the true solution often is more complex (surprise!). If building your financial future is like designing your dream home, then serious questions need to be explored before your wealth building journey begins:
1) Do I have enough money, and if not, how much money do I need to develop my financial future?
2) Can I build it myself, or do I need the help of professionals?
3) Do I have contingency plans in place, should my circumstances change?
4) What tools and supplies do I need to effectively bring my plans to life?
Most investors I run into have no investment plan in place, do not know the costs (fees) of the tools and strategies they are using, and if they are using an advisor (broker) they typically are in the dark with respect to the strategy implemented.
For the “Do-It-Yourselfers”, the largest problem I am witnessing right now is excessive conservatism. Certainly, for those who have already built their financial future, it does not make sense to take on unnecessary risk. However, for most, this is a losing strategy in a world laden with inflation and ever-growing entitlements like Medicare and Social Security. There’s clearly a difference between stuffing money under the mattress (short-term Treasuries, CDs, Money Market, etc.) and prudent conservatism. This is a credo I preach to my clients.
In many cases this conservative stance merely compounds a previous misstep. Many investors undertook excessive risk prior to the current financial crisis – for example piling 100% of investment portfolios into five emerging market commodity stocks.
What these examples prove is that the average investor is too emotional (buys too much near peaks, and capitulates near bottoms), while paying too much in fees. If you don’t believe me, then my conclusions are perfectly encapsulated in John Bogle’s (Vanguard) 1984-2002 study. The analysis shows the average investor dramatically underperforming both the professionally managed mutual fund (approximately by 7% annually) and the passive (“Do Nothing”) strategy by a whopping 10% per year.
Building your financial future, like building your dream home, requires objective and intensive planning. With the proper tools, strategies and advice, you can succeed in building your dream future, which may even include a coconut-umbrella drink.
Navigating the Fixed Income Waters
Fixed Income Rapids Can Be Treacherous
Given the downward plunge in equity markets that started at the beginning of 2008, investors have flocked to fixed income options in droves. But buyers should beware. Swimming in the fixed income markets is not like frolicking around in the kiddy pool, but rather more like swimming in treacherous, crocodile-infested waters. Not all bonds are created equally, so arming yourself with knowledge regarding bond investing risks can save lots of money (and limbs).
Bond prices move in the inverse direction of interest rates – so now that interest rates have fallen to five-decade lows, is now the best time to buy bonds? Certainly there are segments of the bond market that offer tremendous value, but when the Federal Funds Rate (the key benchmark inter-bank lending rate that the Federal Reserve sets) stands at effectively 0%, that means there is only one regrettable direction for rates to go.
Before diving head first into the bond market, investors should educate themselves about the following risks:
Interest Rate Risk: With record low interest rates, coupled with massive amounts of government stimulus injected both here and abroad, the risk of rising interest rates is becoming a larger reality. Large government deficits and expanding government debt issuance can lead to inflation pressures that are correlated to upward movements in interest rates.
Default Risk: Bonds typically pay bondholders interest payments (coupons) until maturity (expiration), however in challenging financial times, various issuing entities may be incapable of paying its investors, and therefore may default. As the recession matures, more and more companies are defaulting on their debt obligations.
Reinvestment Risk: Owning healthy yielding bonds in a declining interest rate environment is the equivalent of sailing with a tailwind – however all good things must eventually come to an end. At maturity, investors must also face the risk of potentially reallocating proceeds into lower yielding (lower coupon) alternatives. For those investors relying on higher fixed income payments to cover living expenses, reinvestment risk can pose a real threat to their financial future.
Callable Risk: Just like ice cream comes in different flavors, so do bonds. Certain bonds come equipped with an add-on “callable” feature that allows the issuer to retake possession of the bond for a predetermined price. In periods of declining interest rates, as we have experienced since the early 1980s, this advantageous option has been included repeatedly by many bond issuing entities. Prepayment risk for mortgage securities can also lead to suboptimal investment returns.
Liquidity Risks: This whole banking crisis that our global financial system is currently digesting has highlighted the importance of liquidity, and the painful clogging effects of illiquid fixed income securities. Forced sales of illiquid securities (due to lack of buyers) can lead to unanticipated and drastically low proceeds for sellers.
Overall, bonds offer tremendous diversification benefits to an investment portfolio and with the exploding baby boom generation entering retirement these fixed income vehicles are attractive. Just remember, before you dip that toe into the bond market waters, beware of the lurking risks hiding below the surface.
Investing Caffeine 
