Malkiel WSJ Editorial - What I Don't Like

[swaption]

What Does the Prudent Investor Do Now?
At a yield of 2.25%, the 10-year U.S. Treasury is a sure loser. Stocks are a safer choice..

http://online.wsj.com/article/SB10001424052702304692804577285712326880238.html?KEYWORDS=malkiel

You may need to be a subscriber to get full access, but the title and the preview pretty much gives you the gist of things. What I don't like is the complete absence of any statement communicating the place for bonds in a prudent portfolio. There is an implied certainty regading the future outcome that I think is an inaccurate portrayal. Sure bonds may be a "loser", but there is very little mentioned about the risk mitigating benefits of this loser. My term life insurance policy is also a big loser, but that doesn't mean that I do without it. Of course Malkiel does not go so far as recommending that people should not invest in bonds, but characterizing bonds as a loser and stocks as safer could easily lead someone down this path.

[beareconomy]

Loser compared to what? Inflation in 2011 was 3.3%. The stock market s and p 500 went up 0, but yielded 2% , so compared to inflation from the CPI it was a loser.

[Random Musings]

It's nice when the author can ignore volatility and how it can affect an investor.

Of course, we have to remember than Malkiel is marketing himself.

In the very long run, I'll be glad to invest in a diversified basket in world-wide equities over bonds - but I'm pretty sure my time frame is long-enough to make an all-in bet.

RM

[wriggly]

For anyone who cannot (or doesn't want to) access the full article, the article concludes with some comments about the particular importance of low fees in a low return environment, and it finishes with:

The only way to ensure that you can enjoy top quartile investment returns is to choose investment funds that have bottom quartile expense ratios. And, of course, the quintessential low-expense instruments are broad-based, indexed mutual funds and ETFs.

[bob90245]

Going by the comments here so far (I haven't read the article), it appears that Malkiel makes the common mistake of examining portfolio components in isolation, and not how each lend their support to the whole.

[vencat]

It would seem that even the great minds sometimes forget the grand principles of asset allocation, buy, hold and rebalance.
The article reeks of tactical asset allocation. Perhaps the saving grace was the part on low costs.
Even idols have feet of clay...

Venkat

[dbr]

It would seem that even the great minds sometimes forget the grand principles of asset allocation, buy, hold and rebalance.
The article reeks of tactical asset allocation. Perhaps the saving grace was the part on low costs.
Even idols have feet of clay...

Venkat

Indeed, the very comment ". . . safer choice" abandons the concept that one invests in both stocks and bonds rather than alternatively in one or the other. I am much tempted to actually subscribe to the Journal to find out what was actually said rather than stand in consternation relative to a headline. Of course, it sometimes happens that the gurus of investing are found making incomprehensible statements that simply leave one in total puzzlement as to what could have actually been intended.

[FabLab]

Going by the comments here so far (I haven't read the article), it appears that Malkiel makes the common mistake of examining portfolio components in isolation, and not how each lend their support to the whole.

In the article, Dr. Malkiel declares that, "Bonds are the worst asset class for investors." However, I take your point and have no intention to shift out of my 50/50 AA.

P.S. The entire article can be accessed by non-subscribers via a simple search engine query.

[investorjunkie]

Boogleheads don't like Malkiel??

I don't see what is wrong with the opinion article. He is simply stating you won't get a return OF your money with bonds in real terms. He's not talking about proper AA or any of the other things you are discussing, nor is his saying you shouldn't have proper AA. Most investors don't think of returns in real dollars.

I'm sure this article is an eye opener to many investors. Though I agree I would have liked for more possible solutions, though currently there are few.

[gwrvmd]

Don't take things out of context, the whole article is for "over the next decade". He is not making absolute statements. Starting with bond yields below the rate of inflation, I find it hard to disagree with him............Gordon

[Munir]

Don't take things out of context, the whole article is for "over the next decade". He is not making absolute statements. Starting with bond yields below the rate of inflation, I find it hard to disagree with him............Gordon

Agree. Very worthwhile article. Balanced and well-reasoned analysis.

[kenyan]

Boogleheads don't like Malkiel??

http://www.bogleheads.org/readbooks.htm

Check out the last entry in the list.

Malkiel was one of the pioneers in advocating low-cost index funds. He is highly respected around here. However, that doesn't mean everyone agrees with everything he says.

[larrydmsn]

For those that don't have subscription, just google "http://online.wsj.com/article/SB10001424052702304692804577285712326880238.html?KEYWORDS=malkiel" and you will see the whole article.

[swaption]

I think ultimately it is a sin of omission. At times, I really wonder if academics, even those as well respected as Malkiel, really get it in terms of what risk means. The primary purpose that treasury bonds serve in a long term investor's portfolio is risk mitigation, much like insurance. At times, the cost of that insurance may be very cheap (i.e 1983 or so). Other times it may be expensive, and perhaps now is one of those times. But that doesn't mean you should do without it, or even that it is a bad deal.

To further things, and I think this is along the lines of the mischaracterization of risk, is the absence of any uncertainy regarding returns. Articles like this lead investors to the misguided expectation that risk means "as long as I can handle the interim volatility, my long term returns will be x". That's not what risk means. There is a far broader realm of uncertainties, and treasury bonds offer insurance against those. But then again, a headline like "portfolio risk mitigation is expensive" doesn't quite grab the reader to the same extent as "the 10-year U.S. Treasury is a sure loser". But to then go on and characterize "stocks as a safer choice", that's just a ridiculous characterization.

[SGM]

It is the second time he has written about losing money vs inflation in treasury bonds and bonds in general. I think the choice is avoid risky stocks and lose money over the next several years, or go with dividend paying stocks. He does think emerging markets look good here. He says keep expenses down. It is a point of view that differs from the Boglehead philosophy of stay the course. If you think markets are less than completely efficient you might be tempted to follow his advice. I have a lot of respect for his views and have read his books several times. You have to know your tolerance for risk.

[abuss368]

He does note in many articles that REITs should increase as one approaches retirement (for the cash flow).

Makes sense.

[baw703916]

How random was my walk...

[madbrain]

For those that don't have subscription, just google "http://online.wsj.com/article/SB10001424052702304692804577285712326880238.html?KEYWORDS=malkiel" and you will see the whole article.

Did not work for me.

[mathwhiz]

You know sometimes you don't necessarily have to be a lemming and fall off the cliff and "stay the course." There were numerous indications the US economy was in a severe real estate bubble in the mid 2000's that would end badly. It was obvious that with 100x PE valuations in the late 1990's that there was an internet bubble. It doesn't take a rocket scientist to see treasuries may also be in a bubble with yields approaching record lows with only one way to go when the economy improves.

Sometimes you have to follow your head and not be a lemming. This isn't stock picking or gambling. This is using your brain and deductive reasoning to make educated investment decisions. It's annoying how sometimes people on this board poo poo people using their brain and connecting the dots.

[investorjunkie]

You know sometimes you don't necessarily have to be a lemming and fall off the cliff and "stay the course." There were numerous indications the US economy was in a severe real estate bubble in the mid 2000's that would end badly. It was obvious that with 100x PE valuations in the late 1990's that there was an internet bubble. It doesn't take a rocket scientist to see treasuries may also be in a bubble with yields approaching record lows with only one way to go when the economy improves.

Sometimes you have to follow your head and not be a lemming. This isn't stock picking or gambling. This is using your brain and deductive reasoning to make educated investment decisions. It's annoying how sometimes people on this board poo poo people using their brain and connecting the dots.

+1.

[vencat]

So, it's obvious that bonds are going to take a hit. Should we then move to 100% stocks or reduce bond holdings?
I don't buy that. For the really nervous one obvious option may be short term bonds (funds), CDs, or I bonds.
Nisi should step in now and give his quantitative take on bond bubbles.

Venkat

[grok87]

I think ultimately it is a sin of omission. At times, I really wonder if academics, even those as well respected as Malkiel, really get it in terms of what risk means. The primary purpose that treasury bonds serve in a long term investor's portfolio is risk mitigation, much like insurance. At times, the cost of that insurance may be very cheap (i.e 1983 or so). Other times it may be expensive, and perhaps now is one of those times. But that doesn't mean you should do without it, or even that it is a bad deal.

To further things, and I think this is along the lines of the mischaracterization of risk, is the absence of any uncertainy regarding returns. Articles like this lead investors to the misguided expectation that risk means "as long as I can handle the interim volatility, my long term returns will be x". That's not what risk means. There is a far broader realm of uncertainties, and treasury bonds offer insurance against those. But then again, a headline like "portfolio risk mitigation is expensive" doesn't quite grab the reader to the same extent as "the 10-year U.S. Treasury is a sure loser". But to then go on and characterize "stocks as a safer choice", that's just a ridiculous characterization.

Good post- I agree with you.
Looked at another way, if you are investing for retirement and are 30 years or so away, I think 30 year tips can take the place of the risk mitigating asset.
Stocks may be a better bet. But as you point out there is risk there. The US could turn into the next Argentina. We only get one go around in saving for retirement. So risk matters. Its not like we are managing some college endowment fund here, where its an interesting theoretical professional investing problem.
cheers,

[stevewolfe]

You know sometimes you don't necessarily have to be a lemming and fall off the cliff and "stay the course." There were numerous indications the US economy was in a severe real estate bubble in the mid 2000's that would end badly. It was obvious that with 100x PE valuations in the late 1990's that there was an internet bubble. It doesn't take a rocket scientist to see treasuries may also be in a bubble with yields approaching record lows with only one way to go when the economy improves.

Sometimes you have to follow your head and not be a lemming. This isn't stock picking or gambling. This is using your brain and deductive reasoning to make educated investment decisions. It's annoying how sometimes people on this board poo poo people using their brain and connecting the dots.

When the market was down 55% did US Treasuries feel like they were in a bubble? Takes a little time for the sting of that to wear off. I'm not so sure that there is a bubble at all in fixed income. I'm not so sure that the generational low rates weren't necessitated by a generational crisis in the equity markets - whether that was the tech bubble, the uncertainty from 9/11 and afterwords or the real estate bubble. So maybe bonds enter a bear market now. Maybe not. But I still don't see that we are in a bubble - just my opinion.

[bob90245]

This is hindsight bias:

You know sometimes you don't necessarily have to be a lemming and fall off the cliff and "stay the course." There were numerous indications the US economy was in a severe real estate bubble in the mid 2000's that would end badly.

What very few knew was that the failure of investment banks like Lehman Brothers and AIG would cause the global financial system to freeze up. Had all that toxic subprime mortage paper not been in the picture, the real estate bubble could have gently cooled of its own excesses.

[umfundi]

http://online.wsj.com/article/SB1000142 ... 80238.html

Keith

[madbrain]

http://online.wsj.com/article/SB10001424052702304692804577285712326880238.html

Keith

Same link where only the summary is available. I give up on the article.

[ej76az]

You can always read a WSJ article by Googling the author and title.

For example, Google Malkiel prudent investor.

[madbrain]

You can always read a WSJ article by Googling the author and title.

For example, Google Malkiel prudent investor.

I googled that, and all the links I found only have the first few paragraphs.
A subscription is needed to read the rest of the article.

[czeckers]

Mentally I've gone back and forth on this. On one hand, with 10-year treasuries in the 2 percent range, their expected return over the next ten years is just that: in the 2 percent range. Whether or not you call it a bubble, that's not great. However, with divident yields on stocks in the 1-2 percent range as well, their expected returns aren't all that great either. If we accept the random walk hypothesis that past events have no bearing on the future in that stock returns are driven by future events which are by definition unknowable. The possibility still exists that there may be some event in the near future that drives stock prices down. War, terrorism, gas price shocks, who knows? It is for that reason that we keep bonds. Since it takes a 100% return to overcome a 50% loss, volatility eats away at compounded returns. Thus, eventhough bonds have an expected return below inflation, they are still required to mitigate portfolio volatility and as "insurance" in case an unforeseen event causes stock prices to drop.

I would never use current bond yields as justification for an all-stock portfolio. However, I can say with absolute confidence that one shouldn't be 100% in bonds either.

The prudent thing to do is stay the course, rebalance periodically, and go out and enjoy life.

-K

[Muchtolearn]

So, it's obvious that bonds are going to take a hit. Should we then move to 100% stocks or reduce bond holdings?
I don't buy that. For the really nervous one obvious option may be short term bonds (funds), CDs, or I bonds.
Nisi should step in now and give his quantitative take on bond bubbles.

Venkat

Or cash like money market funds. I am tempted to consider what authors like Malkiel say but one would never know when to get back to the proper allocation. But indeed these treasury rates seem unsustainably low but Japan too and look what is happening there.

[letsgobobby]

I think ultimately it is a sin of omission. At times, I really wonder if academics, even those as well respected as Malkiel, really get it in terms of what risk means. The primary purpose that treasury bonds serve in a long term investor's portfolio is risk mitigation, much like insurance. At times, the cost of that insurance may be very cheap (i.e 1983 or so). Other times it may be expensive, and perhaps now is one of those times. But that doesn't mean you should do without it, or even that it is a bad deal.

To further things, and I think this is along the lines of the mischaracterization of risk, is the absence of any uncertainy regarding returns. Articles like this lead investors to the misguided expectation that risk means "as long as I can handle the interim volatility, my long term returns will be x". That's not what risk means. There is a far broader realm of uncertainties, and treasury bonds offer insurance against those. But then again, a headline like "portfolio risk mitigation is expensive" doesn't quite grab the reader to the same extent as "the 10-year U.S. Treasury is a sure loser". But to then go on and characterize "stocks as a safer choice", that's just a ridiculous characterization.

Good post- I agree with you.
Looked at another way, if you are investing for retirement and are 30 years or so away, I think 30 year tips can take the place of the risk mitigating asset.
Stocks may be a better bet. But as you point out there is risk there. The US could turn into the next Argentina. We only get one go around in saving for retirement. So risk matters. Its not like we are managing some college endowment fund here, where its an interesting theoretical professional investing problem.
cheers,

If we're the next Argentina, treasury bonds aren't going to be much help.

[FabLab]

You can always read a WSJ article by Googling the author and title.

For example, Google Malkiel prudent investor.

I googled that, and all the links I found only have the first few paragraphs.
A subscription is needed to read the rest of the article.

I don't subscribe to the Journal and, as I said yesterday, a simple search turns it up. At least it did for me. I googled "Malkiel Wal" and the listing for the article's title appeared as one choice among several. I clicked it; it delivered the article in its entirety.

Cheers
P.S. Yes, I only keyed in the first three letters of the word Wall.

[umfundi]

http://online.wsj.com/article/SB10001424052702304692804577285712326880238.html

Keith

Same link where only the summary is available. I give up on the article.

You are right. When I posted the link, it went to the full article. Now it is only the summary. However, I just Googled
Malkiel Wall Street Journal
and found the full article again.

Checking again, I notice a green key and something that says "free pass". I suspect the WSJ is deciding whether or not to let you see the full article. Delete your cookies, or try a different browser.

Keith

[abuss368]

Did anyone read Mr. Bogle's latest interview where he discusses bond yield's?

He noted that the present state of yield's is no reason to be 100% stocks.

Stay the course and follow his lead.

[ej76az]

You can always read a WSJ article by Googling the author and title.

For example, Google Malkiel prudent investor.

I googled that, and all the links I found only have the first few paragraphs.
A subscription is needed to read the rest of the article.

It works for me on this article. However, the WSJ has discovered the technique and is fighting back:
http://searchengineland.com/wsj-pulls-b ... ree-112922

[dbr]

So, it worked to Google into the article.

As I read it, Malkiel is not actually saying anything we don't know. Future looking returns on bonds are low. One can argue that stocks are not expensive. I don't like characterizing the current outlook for bonds as "anything but safe" and "sure loser." These are hyperbole that lose the point of degree and purpose of the investment. He says of stocks that the equity risk premium is about at the historical average. If that is the case, a person with a mixed stock and bond portfolio based on general expectations for stocks and bonds would be about on target and doing nothing right now. He warns that returns should be expected to be low, in comparison to 1982 to 1999. Anybody who hasn't figured that out has been living on Mars since 1999. He points out that more than ever costs matter. Anybody who hasn't figured that out has been living on Mars since 1926.

[madbrain]

http://online.wsj.com/article/SB10001424052702304692804577285712326880238.html

Keith

Same link where only the summary is available. I give up on the article.

You are right. When I posted the link, it went to the full article. Now it is only the summary. However, I just Googled
Malkiel Wall Street Journal
and found the full article again.

Checking again, I notice a green key and something that says "free pass". I suspect the WSJ is deciding whether or not to let you see the full article. Delete your cookies, or try a different browser.

Keith

Deleting the cookies worked, finally...
I guess once you visit a WSJ paywall page they never let you see full articles again.

[umfundi]

http://online.wsj.com/article/SB10001424052702304692804577285712326880238.html

Keith

Same link where only the summary is available. I give up on the article.

You are right. When I posted the link, it went to the full article. Now it is only the summary. However, I just Googled
Malkiel Wall Street Journal
and found the full article again.

Checking again, I notice a green key and something that says "free pass". I suspect the WSJ is deciding whether or not to let you see the full article. Delete your cookies, or try a different browser.

Keith

Deleting the cookies worked, finally...
I guess once you visit a WSJ paywall page they never let you see full articles again.

I think they try to suck you in with a limited number of free accesses. They can count the accesses with a cookie, or by encoding something in the link. (If I send you a link that works for me, it won't work for you.)

I had a similar issue when I used the NY Times for news. After a few days, they shut me off for a month. Now, I use Google for news, and only go to NYT for particular articles. They count a few per month from my phone.

A whole new meaning for the phrase, "Toss your cookies"!

Keith

[ladders11]

Though I agree I would have liked for more possible solutions, though currently there are few.

I think ultimately it is a sin of omission. At times, I really wonder if academics, even those as well respected as Malkiel, really get it in terms of what risk means. The primary purpose that treasury bonds serve in a long term investor's portfolio is risk mitigation, much like insurance. At times, the cost of that insurance may be very cheap (i.e 1983 or so). Other times it may be expensive, and perhaps now is one of those times. But that doesn't mean you should do without it, or even that it is a bad deal.

I agree with these comments. Given an article entitled "What Does the Prudent Investor Do Now?" I expect more reasonable suggestions. Mr Malkiel seems to offer EM equities, buying a house, and minimizing investment costs as his suggestions. Excuse me! How do these solve the problem of poor expected real bond returns?

[pascalwager]

I don't like characterizing the current outlook for bonds as "anything but safe" and "sure loser."

I think Malkiel assumes that few investors would want to invest in a "sure loser". He seems to be advising holding no bonds, as any bonds held would be sure losers. Some could apply their bond proceeds toward a home purchase--and others to purchase more equities.

[Munir]

I don't like characterizing the current outlook for bonds as "anything but safe" and "sure loser."

I think Malkiel assumes that few investors would want to invest in a "sure loser". He seems to be advising holding no bonds, as any bonds held would be sure losers. Some could apply their bond proceeds toward a home purchase--and others to purchase more equities.

My understanding of the article was that Malkiel was describing the different asset types as he sees them without saying invest in this asset or do not invest in that one. It's up to the investor to decide what one's asset allocation should be according to one's individual circumstances, age, wealth, sources of income, risk-taking etc.