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As we all edge ever closer to retirement, assumptions are made about returns on our investments, or as Will Rogers once put it, return of our investments become more critical.
Siegel Study Shows Reversion to Mean
Per a recent Barron's report, Jeremy Siegel of the Wharton School has done exhaustive research that offers some hope to those who have grown discouraged over the dismal market returns of the past decade. Based upon market returns from 1871 to 2010, Siegel has found a tendency that periods of worse-than-average returns are followed by periods of better-than-average returns.
Weak Periods Set Stage for Market Rebound
Annual median returns have run an inflation-adjusted 6.84 percent over 20-year intervals and 6.29 percent over 30-year intervals. Since the returns of the past decade are almost flat, there is historical precedent for the coming decade to provide us a nice bounce-back. The 10-year holding periods following the worst 10-year holding periods show a median performance of 8.17 percent.
The rebound or reversion evidence is even stronger for 20- and 30-year holding periods.
Study Based on Many Rolling Periods
Though this behavior is not based upon analysis of market fundamentals, this does not diminish its significance. Indeed, Siegel's study is exhaustive, covering 135 five-year periods, 130 ten-year periods, 120 twenty-year periods and 110 thirty-year periods. But one always has to allow for the occasional deviation from an historical pattern due to outlier events or conditions.
Treasury Bonds Underperform Stocks Across All Periods
As significant, the data also shows that over all holding periods, treasury bonds underperform stock by half, with the exception of the last 30- year period.
But according to Siegel, the last 30-year period sets up bond market underperformance in the next decade relative to stocks.
Bottom line: While stocks are not for everyone, they have consistently offered better relative return than bonds, and are likely to do so over the next 10 years.
As a caution, even though the average rebound is 8 percent over a decade, in a diversified portfolio, not all assets are stock, so most investors might want to project something lower, depending upon how they are allocated.
Growing Deficit, High Unemployment
Over the past several weeks, partisan debates have raged over how to address two legacy challenges from the Bush administration: a huge and growing deficit and high unemployment.
As investors I caution against taking these oratorical broadsides at face value.
Economic Debate is Like Trench Warfare
A case in point, Republican Ryan in the House has put a broad proposal on the table to reduce the deficit by making broad cuts in federal programs and revamping Medicare, but omitting significant new revenue sources.
The Obama administration reacted by clamoring for higher taxes on millionaires and billionaires, that is, any family earning $250,000 or more.
Beware of Economic Talking Points
Both sides are adroit at crafting and employing repetitive talking points to bludgeon the opposition with -- and in the end, gridlock ensues. We as investors and voters need to break down the arguments and filter out political diatribe from serious economic and fiscal policy debate.
Too Much Expense—Not Enough Revenue
With apologies to the Greeks, rather than resorting to political Greek drama, complete with chorus, our leaders need to acknowledge both a revenue and expense problem and work together to address them.
Demand for U.S. debt has limits -- 47 percent of U.S. debt is held by foreign governments, including more than 13 percent by China. At some point there will be a demand for higher yield.
U.S. Debt Outlook Negative, Credit Downgrade Possible
Last week S&P issued a negative outlook for U.S. debt. Though not a downgrade of U.S. debt from AAA, we can see that result from here. This should be motivation enough for our representatives to set aside political bias.
What Should Be the Common Objectives?
Lower hire cost, reduce deductions, capture more tax at present rates, cut federal entitlement expenses
One: lower cost of adding employees to encourage new hires.
Two: reduce personal and corporate deductions and capture more tax at all income levels without rate increase.
Three: reduce federal expenditures per bi-partisan commission report.
So let’s challenge our leaders to step away from the camera and devote their creative energies to solutions. With business investment, jobs and our overall economy in the balance, our economic and financial futures depend on it.