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Where to Put Your Money

I am no expert, but I found three or four articles over the last month that answer questions that I am often asked.  “Where do you invest your money?”  I have traditionally invested in:

1. My office and staff
2. Tax free municipal bonds
3. Land, when I could pay cash

These excerpts come from Bob Sytz, a CPA and CFP who writes for the McGill Advisory, and Will Deener, a business reporter for the Dallas Morning News.

Sytz reviewed results of investment studies covering the ten year period from 1987-1996.  Over this time period of 2,526 trading days, the stock market produced investment returns averaging 15.1% annually.  However, investors who missed out on the 10 best days of stock market performance had an investment return of only 10.5% annually over this time period.  Those who missed the 20 best days of the market had an investment return of only 7.6% annually, or half of the total return for the ten year period.

Investors missing out on the 30 best trading days over this time period generated annual returns of only 5.1%, while those missing out on the 40 best days had an investment return of only 2.8%.

It is impossible to know when to get out of the market, or get back into the market, and thus a market timing strategy rarely works.

Remember this period (1987-1996) was one of the greatest markets in history.  Also remember you have taxes owed to the government and commissions due to the brokerage firm who manages your account.  Add to this the risk, and you might be lucky to net 6% on your investment.  I thought this was kind of funny:   Fortune magazine has the top 20 investment/asset managers pick one stock at the first of the year that is a can’t miss, it will go up pick.  The top guys who manage and invest billions of dollars only have to pick one stock they feel confident will perform well for 12 months.   These smart guys are up against one opponent:  A Monkey that is taught to throw darts at a wall.   They hang the Wall Street Journal financial page up with the S&P 500 and the monkey throws his 20 darts.  Whatever stock the dart hits, is followed for the same 12 months.  Guess what, the monkey has never lost.

Will Deener in a recent article in the Dallas Morning News puts things in perspective.

Most any broker worth his or her salt will tell you that stocks will outperform bonds over long periods.  That notion has become so entrenched that it has become one of the bedrocks of modern investing theory.

There’s this notion – or shall I say myth – that stocks will pay a 5% premium over bonds if you just hold on long enough.  Brokers and investment advisers will also try to soothe the worried minds of investors by telling them stocks return 9 percent to 10 percent a year on average.

Well, yes, sort of, depending on what time period you want to carve out and depending on whether you enjoy sticking one foot in boiling water and other in cold water land saying that, on average, you’re feeling nice and warm.

If the great bear market of 2008 does nothing else, perhaps it will finally force investors to consider alternatives to the stock market for at least part of their portfolios.

Many investors lost half their retirement savings because a handful of Wall Street bankers were either too stupid or too greedy to understand they shouldn’t bet the ranch on subprime mortgages.

After the debacle, savvy investors should at least reconsider the notion that stocks are a superior investment to bonds.  I know, I know.  Bond funds are boring, and you just want to treat them like that dull cousin who has to play outside while the adults are talking.

But bonds can and do outperform stocks over long periods.  The annualized return of the stock market over the 10-year period ending March 31 was a negative 3 percent, according to Morningstar Inc.  During that same period, longterm government bonds returned 8.2 %.

Consider this:  the loss to stock investors was not just the 3 percent a year, but also the lost opportunity cost of the fine 8.2% gain they could have had with bonds.

Now all you stock groupies calm down and quit chewing on the furniture.  I know that was a little unfair since we’ve just gone through one of the worst bear markets ever.

But there have been other 10 year, 20 year, and even 40 year periods when bonds outpaced stocks.  So how do you like them apples?

Robert Arnott of Research Affiliates did a little ciphering and discovered that bonds outperformed stocks from 1929-1949; from 1968 to 2009; and going way, way back from 1803-1871.

Bond skeptics generally point out that stocks have beaten bonds by 5 percentage points for many decades.  They should be shocked to learn that the 40-year excess return of stocks relative to 20-year treasury bonds is zero.

In other words that 5 percent so-called risk premium of stocks over bonds is a myth.  That’s not to say that there haven’t been long periods when stocks outperformed bonds.   But it may be time, perhaps, to let our little dull cousin come back in the house and talk to the adults.

To contact Dr. Mike Abernathy please e-mail him at: [email protected]