No Need For Corporate Bonds?
A number of articles were written at the end of 2008 noting that, for the prior 40-year period, stocks had barely outperformed safer bonds.
For the period 1969 through 2008, the S&P 500 Index returned 8.98% and long-term (20-year) Treasury bonds returned 8.92%. Results for both large-cap growth and small-cap growth stocks were even worse. The Fama-French large-cap growth research index returned 8.52%, while the small-cap growth research index returned just 4.73%.
Making matters worse, while producing nearly the same return as long-term Treasuries, the S&P 500 Index experienced far greater volatility. Its annual standard deviation during this period was 15.4%, compared to just 10.6% for Treasuries.
That equities could outperform Treasuries over a 40-year horizon by just 0.06 percentage points (and that’s before implementation costs) surprised many investors, but it really shouldn’t have. No matter how long the horizon, there must be at least some risk that stocks will underperform safer investments.
Another Absent Risk Premium
Another risk premium also failed to appear over this same 40-year period, one that received far less, if any, attention. Specifically, there was no corporate credit risk premium.
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Lessons From A Poker Player
As expert poker player Annie Duke explains in her book, “Thinking in Bets,” one of the more common mistakes amateurs make is the tendency to equate the quality of a decision with the quality of its outcome. Poker players call this trait “resulting.”
Resulting can be defined as confusing before-the-fact strategy with after-the-fact outcome. In either case, it is often caused by hindsight bias: the tendency, after an outcome is known, to see it as virtually inevitable.
Duke explains: “When we say ‘I should have known that would happen,’ or, ‘I should have seen it coming,’ we are succumbing to hindsight bias.” She adds that we tend to link results with decisions even though it is easy to point out indisputable examples where the relationship between decisions and results isn’t so perfectly correlated.
For example, she writes, “No sober person thinks getting home safely after driving drunk reflects a good decision or good driving ability.” The lesson, as Duke explains, is that we aren’t wrong just because things didn’t work out, and we aren’t right just because they turned out well.
Don’t Judge Performance By Results
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Financial Perils Of Old Age
In planning for retirement, most people—and their advisors—consider issues such as:
- How much savings will be needed to maintain a desired lifestyle (in other words, what’s your “number”?)
- Current assets and what rate of return will be needed to achieve the stated retirement goal
- What allocation to risky assets, such as equities, is required to achieve the needed rate of return
- What lifestyle adjustments can be made if risks appear?
While addressing these issues is important and necessary, the all-too-common unwillingness of the elderly to even discuss the possibility of losing their independence, and the awkwardness of the subject for other family members, unfortunately can lead to a lack of planning for the financial burdens that long-term > SEE MORE