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Stocks underperformed bonds for last 5,10,15,20 and 25 years

A very interesting WSJ article by Jason Zweig, opints out that stocks UNDERperformed long term treasury bonds in last 5,10,15,20 and 25 years. Then he puts forth some powerful analysis that shows that Siegel's stock data for 1800's is completely suspect and biased and also pointed out how various editions of his nooks came up with ever increasing past return numbers.

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For those without the benefits of a WSJ subscription, and to avoid posting copyrighted material, you can see this article at

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``Using data assembled by other scholars, Prof. Siegel extended the history of U.S. stock returns all the way back to 1802. He came to two conclusions that became articles of faith to millions of investors: .... stocks have generated a "remarkably constant" average return of nearly

7% a year after inflation.

There is just one problem with tracing stock performance all the way back to 1802: It isn't really valid.''

``There is a second problem with Prof. Siegel's data.

In an academic article published in 1992, he estimated the average annual dividend yield from 1802-1870 at 5.0%. Two years later in his book, it had grown to 6.4% -- raising the average annual return in the early years from 5.7% to 7.0% after inflation.''

To be clear, I actually think that now is a good time for investing in stocks. The past 25 years had seen a bull market in in treasuries due to dramatic decline of interest rates. That is a big part of why bonds did so well compared to stocks. I am about 80% in stocks, if I exclude the value of my house.

But the article shows that no outperformance is automatic, or guaranteed. Charlie Munger once, with his usual frankness, called Jeremy Siegel "demented". If I discover that Siegel fudged his data, I would certainly think less of him than before.

i
Reply to
Igor Chudov
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The world stock market value is about $36 trillion and the world bond market value is $45 trillion making the average investment in the stock market is about 44%.

-- Ron

Reply to
Ron Peterson

I'm but a neophite and an amateur, but I think that the stock market is far from the bottom and that bonds are unsustainable with deficits galloping worldwide. I could expand why I think so, but I'll just say that for now, cash.

Those who hold cash when the bottom does come about, will make a lot, a lot of profit. But just not yet.

Reply to
Evandro Menezes

What will happen to those who hold cash if we have a period of high inflation?

Dave

Reply to
Dave

You'll let us all know when the bottom comes, right? And not, say, six months later? Thanks

Reply to
BreadWithSpam

The fact is that there's a lot of credit to be removed from the pricing system for the next months, so it's going to be a deflationary year.

Stock prices are not immune to deflation, especially when the books still look quite horrible. FASB rule changes can only work for so long, and, when the debts stop being serviced and the losses have to be realized, given the record unemployment and the mounting defaults in corporate bonds, an October 2008-like event is quite possible approximately a year after it.

Only after assets are marked down and credit goes back to insane levels is inflation, or even hyperinflation, possible. Until then, the deflation spiral is beating the Fed's presses and cash is not only holding its value but gaining value for now.

My prediction of the future is, of course, as good as anyone's. ;-)

Reply to
Evandro Menezes

Yes, bot only six months later, unlike the OP, who's calling it merely

3 months later.
Reply to
Evandro Menezes

And if the spread on TIPS vs. nominal treasuries goes back to where it was from around Nov'08 to Jan'09, that'd be a hell of an opportunity to take advantage of folks fears of deflation. At that time, "real" yields and nominal yields were almost the same -- a shocking situation, given that the credit quality is identical - and even more shocking when one considers that if held to maturity, TIPs are not only a hedge against inflation, but when they mature, they pay out the greater of their bond factor or par.

Even today, the spread between TIPs and regular treasuries is only a bit above 1%. In the short term, I'm sure inflation may be held in check. In the longer term, odds seem quite strong that inflation will be greater than that.

I'm happy to see folks with as much as half of their fixed-income allocation in TIPs. (only in a tax advantaged account like an IRA or a qualified plan, of course). And I'm much more comfortable with folks going further out on the yield curve in TIPs than in traditional bonds. If/when inflation comes, long fixed-rate bonds are going to get killed, and I'm not prepared to predict exactly when that inflation will be here, nor to risk folks retirements on the chance that it won't come.

Reply to
BreadWithSpam

Of course, the issue is that you will not know exactly what is the "bottom".

i
Reply to
Igor Chudov

I'm a long way away from needing fixed income. However, one thing about TIPS makes me extremely suspicious. TIPS are indexed to the CPI. And some say that the CPI is a fairly poor measure of true inflation. Furthermore, even if the CPI is a pretty good measure of true inflation today, who's to say that it will remain so? If inflation hits double digits but the federal government doesn't want to shell out that kind of interest, what's to prevent them from reporting artificially low CPI numbers? It's sort of like having the foxes guarding the hen house.

--Bill

Reply to
Bill Woessner

The same thing that prevents them from just printing money willy-nilly to pay off regular treasury bonds - protecting the integrity of the "full faith and credit" which backs our entire monetary system.

Given that there are vastly more traditional treasury bonds outstanding, it's much more in the government's interest to have huge inflation (and pay off all that other debt with cheap dollars) than it would be to fight down the CPI.

Note, too, that SS payments (to those who have started taking them) are indexed to the CPI as well. There are a whole lot of folks out there with a strong interest in the CPI being pretty reasonably reflective of costs.

This is not to say that the CPI is without flaws. It has many and they have been well documented. But I don't see tinkering with the CPI as a government-run scam to save money as a serious possibility. If it comes to that, we probably have much bigger problems.

Reply to
BreadWithSpam

Big snip

There was a time where the government of France manipulated what was included in their CPI to hold COLAs down. Could happen here.

Reply to
Avrum Lapin

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