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moneysense.ca, 5/03/09
Is there anything better?
Investors are understandably frustrated that stock returns have been meagre or negative over the past decade. But, if investors are wondering if they should abandon stocks, then, as Thicken My Wallet pointed out in a recent post, investors need to find a better asset class than the one they are abandoning. Which raises the question: Is there any asset class better than stocks?
We’ll turn to the historical record found in Triumph of the Optimisits for the long-term record on the traditional alternative to stocks — bonds. Out of the ten non-overlapping 10-year time periods from 1900 to 2000, Canadian stocks did not have a single period with negative real returns. Canadian bonds and bills, on the other hand, had four losing periods. In the US market, stocks had two periods with negative returns, bonds had five and cash had two. The markets in the UK have a similar historical record: two negative periods for stocks but five for bonds and four for bills.
The historical record shows that investors get better odds of winning periods with stocks than bonds and supports the notion that long-term investors should have a majority of their portfolio in equities. Other alternatives like real estate do not have a sufficient long-term history to compare with stocks.
moneysense.ca, 5/03/09
You have posed an excellent question CC. As an investor who uses a timer, I am out of Canadian equities and have half of my RRSP in XSB which has done well considering the alternatives (up 4.3% over the past six months).
If the market grinds its way lower or sideways over the coming years, the best options I can think of are XSB and a solid, highly liquid, stock that pays a high dividend. I am looking at buying such a stock and then selling covered calls. Of course there is always the risk that the dividend could be cut.
One final option, which is where half of my RRSP is parked, is cash.
Thanks for the link. Rationally, this makes sense but our notion of risk is magnified in downtimes and almost non-existent in good times.
Most investors who have fled to cash, gold, or bonds see this as a temporary alternative. I wouldn’t say that they as a whole believe that those asset classes are “better”, because most investors know that stocks over the long term perform better than any other asset class.
Actually one of the reasons why ordinary investors underperform stock market averages is constant switching of strategies.
Investors can’t seem to understand that there isn’t a holy grail investment method..
[...] the original post: Is there anything better? Share with [...]
Thicken: Yes, the low returns from bonds is due to their lower risk. Still, I’d hold some just to soften the blow from a bad stretch in stocks.
brian: It’s true that some investors have moved out of stocks as a tactical response to the current environment. But many are also questioning the wisdom of stocks for the long run. Like DGI points out, there is little evidence that timing works and stocks still offer the best shot for long-term investors.
DGI: I agree that people have a hard time sticking to a strategy and keep switching, in bull markets they become more optimistic and too aggressive and in bear markets too scared and become too conservative. the opposite of what buffet says “Be fearful when others are greedy and be greedy when others are fearful”.
There have certainly been better choices than stocks over the past year, but stocks look like a great investment looking forward precisely because prices are low right now. There are no guarantees in life, but I’m going with the odds and sticking with stocks. Just today I scraped together some more nickels and piled them into stocks.
Of course by the time people start coming back to stocks, they will have missed most of the return!
Bogle said he doesn’t know anyone in the industry (mutual fund industry in the US) who was able to consistent time the market.
Have anyone researched on Jeremy Grantham? He seems to have made a few major calls that timed the market successfully. Robert Schiller says that if you can time the market (in this context, my guess is S&P 500) correctly 70% of the time, you can beat the market.
Ben Graham defines investing as “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.” From my experience, people who day trade or actively manage their portfolio tend to have a better idea about risks involved and try to protect the safety of principal. From my experience, people who use the set buy and hold methodology only thinks about long run returns. According to Ben Graham, investing requires both safety of principal and adequate returns. Like many others, I find it very difficult to balance the two concepts.
[...] Canadian Capitalist asks us if there is anything better than stocks for long term investing. [...]
That’s an EASY question to answer! The best asset class to invest in during these times is YOUR SELF!!! Upgrade your skills and knowledge! You never know how bad things are going to get, so it’s always better to add more skills to your arsenal! For example…
Learn a new language, like Spanish, French, or for the more adventurous, Hindi or Mandarin! You never know who you may end up working for next and if it doesn’t happen that way, then you can always use that knowledge on your next vacation… Take classes in something of interest to you, say, like Gourmet Cooking! You might need to work in a restaurant if times get really tough, but if it doesn’t get that bad for you, then you can still impress your spouse or friends by inviting them to dinner! If you want a leg up in your chosen profession, then sign up for more professional courses and improve your knowledge! Or if you want to be a better schmoozer, take some Golf or Bartending lessons!
Whatever! It doesn’t matter what! As long as you have an interest in the subject – don’t sign up for something which you will hate, because you probably won’t put any effort into it. Just invest in your SELF!!!
That was an easy question, CC… Next!
Oh and by the way, if you make sure that whatever you learn is from an accredited institution, then it may be considered a tuition expense… In that way, you will get a big fat tax return NEXT year – and hopefully by then the stock market will look good enough for you to use that cheque to buy whatever stock or bond of your choice!
And lastly, you would be helping to contribute to the economic recovery by giving your money to whomever is your instructor in your chosen lesson… Think about it. If you just spend you cash at the local Wal-Mart, most of your spending will go to pay for lead painted or melamine filled products from some foreign country and the earnings will be booked by a foreign faceless retailer. Only a small portion of your spending will go to the employee who lives here and shops in your area.
In contrast… If you buy a lesson, all of that money will go to someone who you will know personally (your instructor). And that person may be more inclined to buy whatever product is made by your employer once they know who is paying their bills. It’s kind of like the movie Pay It Forward!
For anyone questioning the viability of buy and hold investing, see the following post over here: http://langley-financial-planning.blogspot.com/2009/03/rolling-10-year-returns.html
Another good chart is the rolling 30 year returns of the s&p 500 in Bernsteins Intelligent Asset Allocator. There is no 30 year period (going back to the early 1900’s) that returned less that 7% annualized.
Phil: Great answer. And I’m doing my part. I’ve been taking swimming lessons. The instructors are young adults and I’m pretty sure most of their income will be spent locally or put towards their own education. And I’ve been seriously considering enrolling for the CFA exams.
CC: Why do you need the CFA charter holder? You have a great job.
Phil: That is a great answer, I invested very aggressively in myself over the last couple of years, this year has been more of an put all the studying to work.
CC: My Fiance is doing her CFA while I am doing the CFP, I have studied with her throughout the course, I must admit It is very interesting material but unless you will work in the investment banking industry not very useful. I am also contemplating of doing it, since I have studied most of it might give it a try.
I Sold all my bonds. My total assets in stocks is 8 times more than last year.
Some person is saying that dow will be 5000 or 4000. That is a very good chance for investors. He buy at 6500, buy at 5500 ,than final buy at 4500.
He can than fly to africa and forget the password and get retired.
To Bruce,
That’s Harry Dent (The Great Depression Ahead ) new book.. All is over, this is it… going down to 4000, it’s over folks, because of is baby boomer economics outlook. Mind you he also wrote The Roaring 2000s and manage the boomernomic fund from CI, look at his numbers!!!
I think he is full of it!!!
CAB: I’m reviewing the Harry Dent book next week. I have little faith in any predictions on the stock market levels 6 months, 1 year or 2 years (insert any time period) here. And yes, he is the same guy who called for Dow 30,000 or some such number by 2008. He has an explanation for it though: “I missed taking into account the commodity cycle”. If he is wrong, you can bet that he will claim he missed some intergalactic cometary cycle as a reason.
I’m still partially with Bruce. Definitely getting to good buying levels. Everyday it goes down is a day risk is reduced.
I’m far from an expert investor but I think it’s fair to say that each type of investment has its day in the sun.
I’m late to the punch here, but I think that @Phil S. really has the best idea. I would invest 10k on my wife or myself before I would throw another 10k into almost any investment.
But on with “real investments”.
From an inflation-adjusted perspective, the Dow reached its true highs in 2000. What few people are acknowledging is that we have been in a bear market for nearly 10 years. It’s easy to look at recent changes as if they were a true calamity, but really, the average investor had already lost purchasing power from 2000 to 2007.
So CC is asking about the better asset class and there really isn’t one in the US or Canada right now.
The reason is simple. The US is deeply in the red. They don’t have any reasonable surpluses. Which is akin to saying they don’t have any way to pay off the debt. Except of course for printing money.
Unless you manage to increase the goods you produce in proportion with the printed dollars, then you’re diluting the value of the dollars in existence. That’s exactly what the US is planning to do. They’re not tackling the trade surplus, they’re just printing money and that’s why you don’t want to be “in” the US dollar.
If you’re in bonds, your gains will be hammered by the upcoming inflation. If you’re in stocks, you’ll be in non-growth market that will also be hammered by inflation.
If you’re in the Canadian dollar, you’re in better shape fundamentally b/c you actually have a government surplus and a trade surplus. But most of that trade is with the US, so you’re just going to get diluted US dollars until somebody else can start buying Canadian resources.
So if you have money to invest. You either drop it in gold so that you don’t lose purchasing power or you invest in growing market like Australia (where they already have trade agreements with China). China, Brazil, India, Russia are all going to grow. Yes there’s higher risk and volatility, but all of these countries are actually exporting more than they import which means that they can make good on paying interest without diluting dollars.
That’s a big deal right now.
With 45 years of MLS data (at least in the Greater Toronto Area) – real estate has a track record.
The greatst enemy for the Canadian investor is the taman. I held the “sudbury Basin ” but all of my shares were taken waway by Brazil and Swiss by XXSTA who both only wanted to hold the output down so they conrolled the price.Our Govt took milllions by the Capital gains and not caring for Canadians.Its long overdue that whats ours stays ours. All metals should be worke here in Canada before shipping..You cant refil a mine thats exhausted,Its empty forever.All lmetals should be part worked before shipping out.
Mines not worked by foreign owners should be classed as abandonded and revert to the Dominion Govt /Perhaps Premiers would start the retrevial of mines start ing Premier Williamsshould do it for Newfies benefit . Spain has done it with foreign ownership of beach housing held by foreignours with a 25 year gate,
Ian LEAFE