Burton Malkiel Picks Bonds as ‘Worst Asset Class for Investors’

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People often assume that holding cash or investing in U.S. Treasury bonds are “safe” investment choices. After all, money put into the stock market risks some ‘black swan’ event where the stock market crashes and you lose a high percentage of your investment. I wrote recently about the capital asset pricing model (CAPM) which showed that risk and return are related. So there isn’t a high average expected return without a correspondingly high average expected standard deviation.

What people neglect is that there can also be ‘black swan’ inflation events, or even just inflation like the 1970s. I’ve written about the gradual devaluation of the U.S. dollar and titling one article, “Cash Has Been the Riskiest Investment.”

I read recently in AdvisorOne that investing legend, Burton Malkiel Picks Bonds as ‘Worst Asset Class for Investors.’ That article reads in part:

Bonds are the worst asset class for investors,” says Malkiel, the author of A Random Walk Down Wall Street, in an opinion piece published in late March in The Wall Street Journal. “Usually thought of as the safest of investments, they are anything but safe today. At a yield of 2.25%, the 10-year U.S. Treasury note is a sure loser.”

The Princeton economics professor reasons that even if the overall inflation rate is only 2.25% in the next 10 years, an investor who holds a 10-year Treasury until maturity will realize a zero real return after inflation. And if the investor sells prior to maturity, he warns, it will likely be for less than the face value of the note if the inflation rate rises.

Our recommendations on real estate for the past several years have been spot on.

Early in 2005 my father George Marotta and I explained the coming subprime debacle and predicted “the bubble, if it is a bubble, could pop as late as 2006 or 2007.” Our projection was accurate. Real estate continued to rise that year. But it was relatively flat in 2006, underperforming the markets that appreciated over 15%.

I warned again in February of 2008, “For Now, Avoid Real Estate Investment Trusts” and by the end of that year the bubble had burst.

Then in July, 2009 I wrote “Now’s the Time to Buy a House” and in May 2010 I wrote “Now’s Still the Time to Buy a House.” Housing has been doing well and we expect it to continue to do well. It was therefore interesting to read that Malkiel’s top two recommended asset classes were Real estate and Emerging market equities:

He picks real estate as his No. 1 investment bet, followed by equities—emerging markets, especially —in second place.

“Real estate is a particularly attractive asset class,” Malkiel wrote, asserting that it will be one of the best investments over the next decade. “Investors who are currently renting the place in which they live should strongly consider buying.”

Finally, we have written on the critical importance of investing in countries with high economic freedom and low debt and deficit. Malkiel agrees on this as well.

Malkiel said “I’m not negative on the U.S.,” that “my guess is there will be no double dip” recession, and that while he expects “some GDP recovery” in the third quarter, the U.S. economy “will remain sluggish.” Over the longer term, however, he argues that “too much debt is associated with poor economic growth.”

Not only does a legend like Malkiel agree with us, but notice that although he is the father of asset class indexing, there are thousands of indexes to choose from. What is critically important is building your portfolio from the asset classes with the best prospects.

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David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.