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