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Customer Review

on February 5, 2012
One reason to be highly skeptical of all of these kinds of books written by distinguished scholars recommending one asset class over another is that a highly distinguished scholar at the time of the tulip craze in Holland could easily have published a book entitled "Tulips for the Long Run," and there was indeed substantial statistical evidence at that time that tulips were an excellent long term investment. An asset class always looks excellent at the top of the market.
In the late 1920s a number of books were written to the effect that stocks were a good long term investment. In 1994 Jeremy Siegel first published the book "Stocks in the Long Run" based on exhaustive analysis of the past statistics.
In turns out that since 1994 stocks have been quite volatile, its been 18 years now, sort of the long run for a lot of people. Probably the popularity of that book helped inflate the stock bubble that finally burst in the year 2000.
For six years after "stocks in the long run" was first published, stocks continued to do very well indeed, but from the year 2000 to today in 2012, for the last 12 years, stocks have been volatile and not the best long term investment.
As it turns out stocks in 1994 were an excellent 6 year investment, but not the best 18 year investment. They were in actual fact a good short term investment, and had an investor switched to long term government bonds in the year 2000, he would have been far better off.
Long term U.S. Treasury bonds were yielding around 8% at the time of that book's release, and zero coupon U.S. Treasury bonds would have been an excellent long term investment in 1994.
Part of this stems from what we mean by the "long run". For many of us the last 12 years of stock market volatility is the long run.
Now everyone wants to be in cash, the yield on short term treasury bills is close to zero.
It is with this background in mind that we read "Risk Less and Prosper".
Sort of a reflection of the current temper of the times stemming from the volatility in stocks and real estate in recent years.
It is an interesting book, worth reading and taking into account with a grain of salt.
Based on the history of these kinds of kinds of investment books and the timing of their release, "risk less and prosper" may be a good short term strategy right now,reflecting current fears and anxiety, perhaps not precisely the best long term strategy.
30 year Treasury bonds are yielding about 3.15% today, and an 8% Treasury bond purchased in 1994, at the time of the release of "Stocks for the Long Run" looks awfully good today in retrospect.
Current yields of various assets are important.
Thirty years ago, 30 year Long Term Treasuries were yielding around 15% per annum, and in fact they were a better long term investment than stocks or cash.
But 30 year T bonds now only yield slightly more than 3% yield to maturity.
Such is the difficulty of looking at the rear view mirror of investment returns, and forming long term future strategies on the basis of past results.
"Risk Less and Prosper" and "Stocks for the Long Run" are two possible opposing strategies based on studious analysis of the past data.
The difficulty is that the future prospects for the rates of return on assets must surely also be a function of current asset prices at any given time, in contrast to the past statistics of their performance.
Neither "Stocks for the Long Run" nor its opposite strategy "Risk Less and Prosper" could possibly be correct at all times regardless of current asset prices and future unknown prospects for profits and dividends, etc., and the circumstances of the individual investor.
A third investment strategy would be nuanced and well reasoned diversification. No specific asset class can be reasonably called a good long term investment based on past results and an exhaustive study of the past stats, by simply projecting past results into the future.
Since we don't know the future, investors have historically used reasoned diversification between asset classes to reduce the volatility of the entire portfolio.
It is still a good idea.
The author is of course correct that personal circumstances of the individual investor is important.
I agree with Zvi Bodie's view that if an individual needs $X for his minimum goals, he should keep $X in a safe asset. The personal cicumstances of the individual investor is paramount.
One difficulty is in determining what is a safe asset.
TIPS do fluctuate somewhat, and there are some tax issues with TIPS.
So while TIPS are not perfectly safe in real terms after tax, TIPS are relatively safer assets in real terms. We all agree on that one.
Zvi Bodie makes an excellent point there.
With respect to assets far in excess of the minimum needs $X of the individual investor, an investor may wish to consider some diversification, especially over the longer run.
The real rate of return of TIPS fluctuate, TIP securities do fluctuate in price and rate of return, and in recent times the indicated real yield to maturity on some TIPS securities have been negative, as investors rush into the safest assets and have bid their prices above par.
This raises the question of whether it is really advisable for all investors to keep 100% of their assets in TIPS securities in the long run.
Current asset prices and the current yield on assets can be quite important. Timing can be important.
Just as it would have been more useful if "Stocks for the Long Run" had been published at a time when stocks were a good long term investment, it would have been better if a book advising investments in TIPS had been published at a time when stocks were hitting all time peak prices and the real yield to maturity of TIPS were significanlty positive and not negative.
(full disclosure: I have used the author's excellent text as a professor of finance at the graduate level. I have the highest respect for Zvi Bodie and his scholarship.)
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