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Dear ,
Stocks for the long haul and other wives tales. A look at a new study!
What warning will you find in every prospectus in this country? Can you recite it from memory? Past performance does not guarantee future results. We hear it all of the time but how many people do you think really pay much attention to this warning?
Let's start with this observation: just because something has not happened, EVER, in 122 straight years doesn't mean that it can't happen tomorrow. That is the point of Nassim Taleb's book The Black Swan:The Impact of the Highly Improbable.
 One of the accepted beliefs that has been drilled into everyone's head is that stocks are less risky than bonds as holding periods lengthen. This was the premise of Dr. Jeremy Siegel's 1994 bestselling book Stocks for the Long Run. This book is required reading in most economics and business schools.
It has even led to the Siegel Constant. The belief that equities have consistently produced returns, including reinvested dividends, of 6.6% after inflation.
Here is an excerpt from the book:
"The following table displays the relative frequency of stocks outperforming either bonds or Treasury bills as a function of holding period. Specifically, stocks outperformed bonds over a thirty-year holding period 100% of the time from 1871 to 1993. From 1802 to 1993 stocks outperformed 97.2% of the time. The only time other than the present when stocks underperformed bonds over 30 years was the 1840s."
As you can see from the preceding paragraph, stocks had dominated bonds for so long that it became accepted wisdom that it would always be that way. And from that accepted wisdom came the whole investment philosophy of "hang in there, it'll get better. You're in it for the long haul.".
Now what is a Wives Tale? Old wives tales are common sayings, such as sitting to close to the T.V. hurts your eyes, that are not true. So the question becomes, is it true or not? Do stocks always outperform bonds over the long haul? There has been a new study that challenges that belief. Let's take a look at the data.
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As you can see from the table above, as of 9/30/2011 the 30 year bond had beaten the S&P 500 over all time periods. As of 6/30/2012 bonds beat stock in all but two time periods. So as you can see, just because something hasn't happened in a long, long time, doesn't mean that it can't happen. Now what explains this change?
Well as Harry Dent has said, "there are seasons in the economy". In other words, things change. There are long term trends that allow certain strategies to work for a long time. They work right up until they don't. Does that mean they won't work again? Not at all. At some point the seasons will change and those old strategies will work again, but not right now.
So are we totally against equities? Not at all. We just think you have to be much more selective. The days of just spreading it around and hoping for the best are over in our opinion. Would you like to know what we do differently? Then please give us a call or send us an email!
preames@reamesfinancial.com
Funny Headlines
I've written several times in the past about how misleading the headlines can be. I ran across this example this week and had to share it. Take a look.
Here are two headlines, one right above the other, that say the exact opposite thing. The first headline says home prices are falling and the second headline says home prices are rising. Which is it? Makes you wonder what the editor was thinking!
Until next week , Protect Your Wealth!
Sincerely,
  
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