Burton Malkiel: Investing in Bonds Instead of Stocks is a 'Huge Mistake’

Tuesday, 14 Aug 2012 11:34 AM

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Despite high-frequency trading and increased volatility, stocks are still a better investment for most people than bonds are, according to economist Burton Malkiel.

“I believe that investors who pull their money out of the stock market today to invest in bonds are making a huge mistake,” Malkiel writes in The Wall Street Journal.

“Investors saving for retirement have no reason to fear day-to-day or week-to-week volatility,” Malkiel says. “The correct response is not to ‘do something’ but rather to ‘just stand there.’”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

In addition, he continues, long-term investors who buy and hold low-cost, broad-based index funds and (indexed) exchange-traded funds achieve well-above-average returns.

“During 2011, index-fund investors outperformed over 80 percent of actively managed equity funds,” he says, according to The Journal. “The same results have continued in the first half of 2012.

“Moreover, equities today are more attractive relative to bonds than at any other time in history. Locking retirement funds into ‘safe’ 1.5 percent yielding Treasury securities is likely to be a sure loser after inflation,” he adds.

Leon Cooperman, chief executive officer of Omega Advisors Inc., agrees that stocks rather than bonds are the place to be, since stock prices are underpriced.

Further, he says, stocks will climb because of the unlikely chance of a recession and a corresponding bear market, supportive monetary policy from central banks, low valuations and the general willingness of investors to take on risk.

“Stocks are cheap against inflation, they’re cheap against their own history, they’re cheap against interest rates, they’re allowing for slower secular growth and they’re allowing for lower interest rates,” he states.

Speaking at the CNBC Institutional Investor Delivering Alpha conference in New York recently, Cooperman compared buying Treasurys with “walking in front of a steam roller to pick up a dime,” Forbes reports.

Cooperman believes the bond trade is overdone, particularly since the yield is so low on government bonds.

“U.S. government bonds are to be avoided,” he said, CNBC reports. “They are a very unattractive asset class.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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