TheLiveBigWay* Digest – Don’t Do Something, Just Stand There!

TheLiveBigWay* Digest – Don’t Do Something, Just Stand There!

Storied bond investor Bill Gross was recently and widely-quoted saying that “the cult of equities is dying”; the latest salvo in PIMCO’s “New Normal” campaign. We continue to find the arguments for a “New Normal” less than compelling on several counts, not least that there is no viable alternative to equities (as discussed in our recent post, “The Only Game in Town”).  We were glad last week to find that our position was shared by Burton Malkiel, famed Princeton economist and author of “A Random Walk Down Wall Street” now in its 10th edition and one of the best books ever to explain how markets work.

Malkiel observes, among other things, that much of the heightened fear related to the stock market is tied to concern that high-velocity trading has led to a world where the average investor is more likely to get hurt, if not outright fleeced, by professional traders.  Professor Malkiel suggests that the best way to immunize oneself from the risks of higher volatility is simply to not play the game.

“Should individual investors have reason to abandon the stock market because of the increased volatility rapid-fire trading can cause? Not at all. Investors saving for retirement have no reason to fear day-to-day or week-to-week volatility. The correct response is not to “do something” but rather to “just stand there.” Evidence continues to accumulate that the long-term investor who simply buys and holds low-cost broad-based index funds and (indexed) ETFs does not achieve mediocre returns but well-above-average returns. During 2011, index-fund investors outperformed over 80% of actively managed equity funds. The same results have continued in the first half of 2012.” Click here to view the full article (for non-WSJ subscribers, this link will only be valid for seven days).

Beyond volatility, of course, the main concern of investors is actually earning the returns needed to reach goals and/or sustainably meet spending needs.  On this count Malkiel shares our view, stating unequivocally, “…equities today are more attractive relative to bonds than at any other time in history. Locking retirement funds into ‘safe’ 1.5% yielding Treasury securities is likely to be a sure loser after inflation.” As did we in “The Only Game in Town”, Malkiel ends with a strong admonition regarding the absolute necessity of committing to a substantial stock allocation in any retirement portfolio.

“In this low-return environment, saving for retirement is extremely difficult. The return assumptions for most pension plans tend to be overly optimistic. Certainly, fixed-income investments will never earn the projected returns required. The only hope both for individuals and for institutions running retirement portfolios is to increase, not decrease, the share of the portfolio devoted to equities.”

In the end, we find ourselves agreeing with the Financial Times’ Jonathan Eley (link requires free registration for non-FT subscribers) who quips, “I just cannot believe that the death of equity is anything other than, as Mark Twain might have said, greatly exaggerated.”

YeBu in the Media

Recently, Dave was featured on the local CBS news during a segment for ConsumerWatch regarding Social Security.

The feature was based on an Associated Press piece pointing out that for the first time ever retiring Americans will be getting less out of Social Security than they put in. And, it is only going to get worse.

With fewer workers paying taxes and more baby boomers retiring, there is legitimate concern over the sustainability of the program.  However, Social Security is still a good deal as it helps those who have an inability to save. And with 32% of retirees reporting that they have not saved for retirement (the majority of those who reported some savings included income expected from Social Security), it’s clear that Social Security will continue to fill a critical need for most Americans even if it doesn’t return 100% of what they paid into the system.  Watch the full 2.5 minute clip featuring Dave’s insight here.

Visit the Social Security website to determine your benefit amount.

An Evening with Greg Valliere – A View from Washington now available for download!
For those of you who missed our conversation with Greg Valliere, or those who would simply like to hear it again or share with friends, a recording is now available from our website. We think you’ll enjoy Greg’s political insights, but suggest you ignore anything he says that may resemble investment advice, a topic that’s outside of Greg’s primary realm of expertise.

-The YeBu Team


Dave Yeske