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  • Interesting Pundit comments

    I bumped into some market commentary online ( shocking I know) , but I found some of the comments to be interesting. Below is a small piece of the post regarding comments from Mark Yusko. I found his comments on future expected returns to be interesting. Not that I am changing my investment plan, as I am happy with what I have put together. Anyways, just sharing interesting stuff...a link to the full commentary is below.

     

    Look, there are four risks we can take as investors:
    We can take the risk free rate. That is now 0%. We can take credit risk. We can buy a bond. You get 2% above risk free long term. You know the return over the next ten years. It is 2%. We know this. It is 100% correlated to the yield. (Note: If inflation is at 2%, the real return after inflation is 0%).
    Yusko told a story about an advisor he met recently. He asked him why he was throwing so much money into bonds. The advisor said because he needs to make 7 ½% for his client. But you are going to make 2% Yusko told him. But my client needs to make 7 ½%! But you’re going to make 2%.

    The advisor said, “No, no, no, over the last ten years I’ve made 7 ½%.” Yusko answered, “But ten years ago the yield was 7 ½% and 20 years ago it was 11% and 30 years ago it was 17%. Today the yield is less than 2%, you are going to make less than 2%.”

    You can take equity risk. Normally, you get 5% above bonds. That’s 7% above the risk free rate. The long-term risk free rate is 4%, bonds earn 6% and stocks earn 11%. Long term. The problem is the market is so grossly overvalued. Read Crestmont Research’s piece titled, Waiting for Average, and read how long it will take to compound at 10% annualized returns on stocks. I won’t ruin it for you but it is forever. The problem is today the risk premium is very low. Jeremy Grantham from GMO would say it’s negative. Research Affiliates would say it’s negative. We are going to have no return for U.S. stocks for the next seven to ten years (for the index). It doesn’t mean there won’t be pockets. Doesn’t mean that won’t be places that will produce returns.
    The third risk you can take is illiquidity risks. Private equity, private real estate, private energy, private debt. The long-term return on private equity is 16%. We think it is still going to be 13% or 14% over the next decade.
    The last risk you can take is structure. That’s just a fancy term for leverage. If you can get it, take advantage of it.
    More from Yusko:

    The “Value of Value” – my recent quarterly letter. 65 pages but the point is just about everyone thinks value is dead. Nobody wants it. That’s when you want to get it.
    For the coming decade, 60/40 is dead money.

    The full post can be found at : http://www.cmgwealth.com/ri/radar-best-ideas/

  • #2
    They think value is dead or there is no value? The risk free rate is usually a US treasury, commonly the 10 year, which is currently 1.7% and adjusted for inflation that would be zero. However, thats still a bit of trickery in the language there. Theyre right about bond returns though, your expected long term return is the face coupon amount when buying individually and holding until maturity. Obviously thats different for funds that cycle continuously, but still likely can use the average weighted value.

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    • #3
      They are bullish on value, worth reading the brief statements on the link.

       

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