Tags: Malkiel | Stocks | Treasurys | bonds

Burton Malkiel: Stocks Are Safer Bet Than Treasurys

Friday, 23 March 2012 01:26 PM

Economist and "Random Walk Down Wall Street" author Burton Malkiel says bonds, usually thought of as the safest of investments, are anything but safe today.

"Bonds are the worst asset class for investors," Malkiel writes in the Wall Street Journal. "At a yield of 2.25 percent, the 10-year U.S. Treasury note is a sure loser."

Even if the overall inflation rate is only 2.25 percent over the next decade, an investor who holds a 10-year Treasury until maturity will realize a zero real (after-inflation) return, says Malkiel.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

"If the investor sells prior to maturity, it will likely be for less than the face value of the note if the inflation rate rises," he points out.

Even if the inflation rate remains moderate, interest rates are likely to rise to more normal levels as the economy continues to recover. "Investors with long memories should recall that over the entire period from the 1940s until 1980, bonds were a horrible place to be," Malkiel says. "Given the likely trends, U.S. Treasurys and high quality bonds are likely to be extremely poor investments and are very risky."

Equities, Malkiel notes, are still attractively priced, despite their substantial rise from the October 2011 lows.

"A good way to estimate the likely long-run rate of return from common stocks is to add today's dividend yield (around 2 percent) to the long-run growth of nominal corporate earnings (around 5 percent)," Malkiel says.

"This calculation would suggest that long-run equity returns will be about 7 percent—five percentage points more than the safest bonds. This five-percentage point equity risk premium is close to the historical average."

Malkiel finds emerging market equities particularly attractive. “The price/earnings multiples for emerging markets have traditionally been about 20 percent higher than for U.S. stocks,” he says. “Today they are 20 percent lower.”

Moreover, emerging markets’ younger populations and better fiscal balances make them likely to continue to grow at a far more rapid rate than the developed world.

Real estate is a particularly attractive asset class. Investors who are currently renting the place in which they live should strongly consider buying, says Malkiel, especially given severe price drops and low mortgage rates for qualified buyers—plus which, under present tax laws there are advantages to owning since mortgage interest is deductible and rent is not.

NASDAQ reports that sales of existing homes in January and February were at their highest level since 2007, though sales in February edged down by 0.9 percent from January on a seasonally adjusted basis.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

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