In a great piece on ‘ What does the prudent investor do Now?’, the Wall Street Journal’s Burton Malkiel echoes a fear that many investors are facing every day- Bonds.
Bonds seem poised for a fall. Malkiel Writes:
“Bonds are the worst asset class for investors. Usually thought of as the safest of investments, they are anything but safe today. At a yield of 2.25%, the 10-year U.S. Treasury note is a sure loser. Even if the overall inflation rate is only 2.25% over the next decade, an investor who holds a 10-year Treasury until maturity will realize a zero real (after-inflation) return. If the investor sells prior to maturity, it will likely be for less than the face value of the note if the inflation rate rises…
A good way to estimate the likely long-run rate of return from common stocks is to add today’s dividend yield (around 2%) to the long-run growth of nominal corporate earnings (around 5%). This calculation would suggest that long-run equity returns will be about 7%—five percentage points more than the safest bonds.”
Hmm- long term equity yields of 7%. Coupled with the risk of volatility and fees in the form of mutual funds, managers, or even small fees from index funds… For a 7% long term yield.
This certainly makes the 5 to 6% long term yield of the Secondary annuity marketpalce look VERY attractive.
After all, these retirement savings are destined to produce INCOME anyway, so why not invest your funds in the best yielding, yet safest, income stream you can find? I challenge you to find a higher yield with comparable safety.
Malkiel continues that Shiller’s P/E ratio would suggest that stock valuations are high but
“the average earnings over the past 10 years are likely to be well below the current normalized earning power of U.S. corporations”.
What asset classes are safe and might outperform? emerging market equities and real estate.
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