Question:
I have recently read a few articles questioning the suitability of equities for long-term investing. It appears that there is a relatively new school of thought championed by Zvi Bodie, that claims equities are simply too risky for long-term investment. Could you provide your perspective regarding the suitability of equities for long-term investing? If equities are not a good choice, is now really a good time to invest in bonds or bond funds?
Answer:
If you read further into this, Zvi Bodie has been championing this for several decades. What he says is, instead of saving 10% of your earnings for retirement, you should be saving 20% to 30% and you should also not expect to retire at 65. He believes if you are above the substantive level of income, you can save anything in excess of that. You would have to cut out rewards now to save everything for retirement, investing your money in CDs or Treasury Inflation-Protected Securities (TIPS), thus eliminating the risk of stocks. TIPS are considered extremely low-risk since their par value rises with inflation. Right now, this would be about a 2% return on your capital.
If you look at history, in 68 overlapping 20-year periods, long-term government bonds were the highest returning asset once, while stocks were the highest returning asset the other 67 times.
Further, Zvi Bodie looks at investors who have quite a bit of stock exposure and fall victim to bad timing as to when they retire. An investor who was 100% in stocks through the 80s and 90s has a much different view of retirement than the investor who was 100% in stocks and retired at the end of 2008. This discounts any planning that we may do for a client.
This brings us to our Ten Year Rule in that any money needed in the next 10 years should be in fixed-income investments that match your liquidity needs. Any money not needed should be invested in high-quality stocks or mutual funds for growth. The reason we have our Ten Year Rule is that it gives you the opportunity to wait out a depressed market. You have the ability to wait out the bottom. We agree that bonds are safe investments, but only when held to maturity.
In the 30 year period from 1981 to 2011, bonds had an annual return of 11% while stocks had a return of 10.8%. However if you look over the last 100 years, stocks do about double what bonds do. The period in question saw an unprecedented drop in interest rates. The fallacy is to think that this will continue. Equities are there to provide an investor ownership in an income-producing asset over the long run. They are designed to go up in value over time, because as earnings grow, your investment should grow.
At Henssler Financial we believe you should Live Ready, and that includes understanding how your investments should work for you. If you have questions regarding your investment strategy, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
