Why Stocks Are Your Best Bet with Jeremy Schwartz, WisdomTree (Nov 29, 2023)
Are equities the best long-term investment? If so, is that always true? In this episode of At the Money, we speak with Jeremy Schwartz about why you should, or should not, go heavy on stocks.
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About Jeremy Schwartz:
Jeremy Schwartz is Global Chief Investment Officer of WisdomTree, leading the firm’s investment strategy team in the construction of equity Indexes, quantitative active strategies, and multi-asset Model Portfolios. He co-hosts the Behind the Markets podcast with Wharton finance Professor Jeremy Siegel and has helped update and revise Siegel’s Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies.
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Stocks have outperformed every other asset class over the long run, assuming you measure the long run at about 20 plus years, real estate, gold bonds. It’s hard to find anything that has a track record as good as equities since the late 19th century. The challenge? Stocks can be risky, even volatile, 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.
I’m Barry Ritholtz, 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, 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 inflation. 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 data, he had this 200 years plus of returns across stocks, bonds, bills, gold, the dollar.
You had 6. 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, we tend to think of 7 to 10 years as a good forward looking indicator. There are periods where stocks can go down. Uh, the, the longest period we had in our data was 17 years of Losses of purchasing power, so after inflation, purchasing power.
Sixty six to eighty two, or was it earlier than that? 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 Protective Securities that get an adjustment for inflation, so the primary risk to bonds was that inflationary period.
Um, but you actually had negative. Tips yields not so long ago. Um, just before this recent increase in rates 18 months ago, you had negative yields, you know, so, so if I’m a long-term investor, if I’m gonna hold on to my portfolio for 10 or even better 20 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 long run, you can have long term losers. Um, 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 is one of the reasons 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 66 to 82, 2001 to 2013, equities did poorly.
More recently. The first quarter of 20 and then pretty much all of 2022, 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. Uh, you know, the cash today is 5%. So people say, is that now a 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 75%. You zoom out to 10 years, it’s like 85%. And 20 years. It’s 99 percent of the time to stocks. Just about always. Almost always. So, we, 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 drawdowns. 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, a five, a seven year bear market? If we’re coming off 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 Siegel’s good friends, Bob Schiller, wrote Irrational Exuberance.
You get to these periods of irrational dis 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 40, under 30, when markets pull back, they shouldn’t be dour about it.
They have a 30 or a 40 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’re, you start thinking the world’s gonna 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 an investor be thinking about that? Gold has been one of those ideas of it’s an inflation hedge. It has kept up in Siegel’s 200 years of data. It has kept up with inflation, but delivered less than 1 percent a year over the last 200 years.
So it’s been a good inflation hedge. It kept up, but not much more when stocks did 6 percent on top of inflation. So I think the, the hardest challenge is you can say, yes, I’m worried about inflation, gold, something to look at. Uh, we’ve done some things that wisdom tree looking at capital efficient 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, you know, better long term accumulations 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 sell offs?
Risk always exists. We’ve been living with these types of risks for, throughout all of time. I mean, they do seem to be more presence 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 are they going to bring it to the U. S.?
And all sorts of questions. These things always are there. They’re in the background. Uh, but that’s one of the things that gives stocks a risk premium. They’re premium returns because they have risk. If you didn’t to have risk of 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. Uh, but it’s also true. That bonds are more expensive than their history.
So people say, again, I get 5 percent in risk free treasuries. Should that lower the case for stocks? That’s the short term rate. Um, you know, you got to look at tips, yields, tips are those inflation protected securities, the 10 year tips are right around 2 percent today. Uh, You look at stocks, P’s below 20 called 18 to 19 forward PEs.
That’s giving you a five to 6 percent earnings yield. So the equity premium of stocks versus tips is above 3%, which is exactly the same as Siegel’s 200 years of data. There was a 3 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 200 year data, but it’s reasonable equity risk premium today. So what are the biggest challenges to staying invested for the long run?
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 gonna be more about geopolitics over the next 12 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 6 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 better 20 years should own a diversified portfolio of equities.
The caveat, they should expect volatility in the occasional drawdown, 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. Find it in our Masters in Business feed, at Apple Podcasts. Each week, we’ll be here to discuss the issues that matter most to you as an infester. I’m Barry Ritholtz. You’ve been listening to At The Money.
Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies, Sixth Edition 6th Edition by Jeremy Siegel with Jeremy Schwartz
