Tuesday, May 12, 2009

Siegel v. Arnott: Both Have Winning and Losing Arguments for Me in my Dynamic Asset Allocation

ADDED 5/14/09:  Subsequent to this post, I wrote a more detailed Gateway Post on Siegel's thesis of stocks providing the best option for long term investors. To Professor Siegel: Time for a Re-Think
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Maybe the perma bears like Alan Abelson need to read the Bible. I would recommend starting with Ecclesiastes 3:1, where RB in one of its frequent moments of delusion says that the Lord was speaking to it about stock investing. Ecclesiastes 3:1 To every thing there is a season, and a time

LB added the observation that RB can not distinguish between its delusions and inspirations, so no wonder the Headknocker has all of his confidence in Our Great Leader, LB. Given the current hiatus in the market, as it digests one heck of a move from early March, the staff has turned its attention again to the theoretical foundations of investing. 

Jeremy Siegel wrote an article responding to some claims made by Robert Arnott.

Siegel's article is worth a read. Yahoo! Personal Siegel is responding to Arnott's recent article that takes direct aim at Siegel's Stocks for the Long Run. Bonds: Why Bother? - Journal of Indexes 

I would recommend reading both articles, and will assume familiarity with them in my discussion for today.  I am going to read Arnott's paper again tonight.


I have previously discussed claims  made by both Siegel and Arnott on issues relevant to asset allocation, which is what my blog is really about with occasional excursions into other topics of interest. 


As I interpret their  dispute, it is about whether stocks are even worth the risk when you have a long term perspective. After all, there was a super bull cycle in stocks starting in 1982, and a twenty year treasury outperformed stocks I believe from 1982 to now.

So, what do I make of all of that? 

I agree with Siegel that stocks present the better opportunity over bonds looking forward at this moment in time, though I would not try to look more than five or ten years in the future. I agree with Arnott's analysis about the importance of dividend paying stocks in the portfolio and the performance of bonds versus stocks over the past few decades.

There is something to be learned from both gentlemen. For an individual, Seigel needs to remember that there is usually a substantial amount of situational risk that needs to be addressed in asset allocation.  Individuals are not pension funds riding 100 year waves. Arnott is telling me something that I already know, someone who kept a constant allocation in stocks would have been better off in 20 year Treasuries over the past 40 years. So, are stocks worth the risk, a frequent topic of my posts, along with numerous methods used to manage that risk? I believe that Siegel has the better argument for at least the next decade about stocks outperforming treasuries. Why?  This is not rocket science, stocks have been crushed and treasuries have rallied so much that their yields are just paltry. I have no interest in any U.S. treasury other than possibly adding to my existing position in TIP. So I  can not make the same argument now for treasuries than I could have made going back in time to 1981, when I could have bought 20 or 30 year treasuries to yield over 14%.  For me, this debate is not an academic one, and the arguments have bearing on my Dynamic Asset Allocation approach to investing. GATEWAY POSTS: LINKS IN ONE POST:

For the next five to ten years, I am going with Siegel's argument, then I may have to change back again.  I just try to incorporate their arguments up to a point and then I discard them.

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