Worry-Free Investing

Comments

1. Bayan says

   September 10, 2009 at 11:16 pm

   The central theme of this book is that stocks are risky, even for long time horizons. In other words, you can’t rely on “time diversity” to reduce risk. If you are depending on harvesting capital gains from a stock dominated portfolio to fund your retirement, you might outlive your assets. But, what about that more than 10% average return on the S&P 500 since 1926? The key word here is “average.” The average is not necessarily what you will realize over any given span. It took decades for the Dow to return to its pre-depression level. The Dow also went nowhere from the end of the 1960’s until the beginning of the 1980’s. But at least you got a decent dividend yield in those days. That’s why the net returns were generally positive in the past. In fact about half the historical return on the S&P500 was due to dividends. But today’s S&P dividend yield is less than 2%. That’s too small to compensate for the price risk. There are other reasons why future stock returns might not reach anything like 10%, and the book provides some discussion as to why. However, the authors are short on details, a little too short. If you want a more through discussion, see “Valuing Wall Street,” which pretty much takes the same position with respect to the future prospects for stocks. The authors recommend inflation-indexed US Treasury bonds, both TIPS and I-bonds as the core of your retirement portfolio. This was good advice several years ago, but not today. The base rate on these bonds is much too small. Can you live on a 1.5% (real) return? So to some extent this book is already obsolete even though it was just published! Nevertheless, it’s a valuable consciousness raiser for those who might not appreciate the flaws in the “cult of equities.” I think the retirement investor is going to have to assume some risk and go for non-inflation protected bonds, but that’s not worry free investing. Another solution is to keep on working. If you have a more than 50 year time horizon, there’s an even worse problem-demography. There won’t be enough young people to do the work for the retirees, no matter what their financial assets. So people are going to have to retire later, say after 70. But that’s ok as people seem to be living longer in good health. It might be better to hire a personal trainer than a personal investment advisor.

   Even though I like the book’s viewpoint, I can’t give it a top rating because I think it’s a little too skimpy. The authors more advanced books are much better. Having read them I find this book a bit of a disappointment.

2. Kye says

   September 11, 2009 at 12:51 am

   Investors still numb from their stock market losses in recent years will find some solace in the message of Worry-Free Investing by Zvi Bodie and Michael J. Clowes. They argue that stocks are “not safe in the long run” – a dismissal of Wharton School Professor Jeremy Siegel’s extensively documented work on the subject. It is the nature of equity prices to be uncertain. The unpredictable risk of future stock market returns stems from the unexpected, ‘random’, flow of information that changes investor’s perceptions of a company’s value. Their argument is a bit heavy-handed. Equity prices may move unexpectedly in the intermediate term, but over the long run they appear to be positively linked with advances in our economy as measured by our GDP and mirrored in our standard of living. That should give some reassurance to long term investors, but the connection gets no mention here.

   The authors make the case for investing in inflation adjusted, government protected I Bonds and TIPS (Treasury Inflation-Indexed Securities also called Treasury Inflation Protected Securities). Focusing on the major goals of saving for retirement and providing for college education costs, Bodie and Clowes show how much an investor needs to save today. If the calculations seem a bit heady, readers are referred to the book’s companion web site ‘calculator’. At the heart of worry-free investing as defined by the authors is the defense of an individual’s future buying power rather than the building of incremental wealth.

   Stocks have been widely touted as the only reliable hedge to inflation. However, during the 1970’s sustained inflation ravaged stock market returns on an (inflation) adjusted basis. Had TIPS and I Bonds existed, they would have outperformed a diversified basket of stocks. Indeed, most investors today should use TIPS and I Bonds alone, we are boldly told. And all investors should invest at least some of their retirement assets in these two investment tools. Unfortunately for those inclined to follow this last advice, it is not clear if many (or any) company sponsored retirement plans (401(K)’s etc.) offer these products.

   The author’s focus on inflation at a time when it is barely detectable may seem problematic, but a recovering economy, growing budget deficits, and a weakening dollar carry their own consequences. In the end, Bodie and Clowes overplay their case for I Bonds and TIPS. Not all products and services in the economy adjust in lockstep as do these bonds with Bureau of Labor Statistics measures of inflation. As a consequence a near exclusive reliance on these bonds may prove comforting but ultimately ineffective to reach a desired goal. Still, the understanding and use of these investment tools could prove important in a balanced portfolio in the years ahead. Now is the time to look at the issue.