Economist and author of A Random Walk Down Wall Street Burton Malkiel says U.S. stocks should produce returns about five points higher than the yield on safe bonds.
"If an investor buys a 10-year U.S. Treasury bond and holds it to maturity, he will make exactly 2 percent, the current yield to maturity," Malkiel writes in The Wall Street Journal. "Even if the inflation rate is only 2 percent, the informal target of the Federal Reserve, investors will have earned a zero rate of return after inflation."
The dividend yield of the U.S. market is about 2 percent, notes Malkiel, and, over the long run, earnings and dividends have grown at 5 percent per year.
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"Thus, with no change in valuation, U.S. stocks should produce returns of about 7 percent, five points higher than the yield on safe bonds," says Malkiel. "Moreover, price-earnings multiples in the low double digits, based on my estimate of the earning power of U.S. corporations, are unusually attractive today."
With a higher inflation rate, U.S. Treasurys will be a sure loser, says Malkiel. Other high-quality U.S. bonds will fare little better.
“The yield on a total U.S. bond market exchange-traded fund (ticker BND) is only 3 percent, Malkiel says. “Bonds, where long-run returns are easy to forecast, are unattractive in the U.S. and Japan, as well as in Europe, where defaults and debt restructurings are likely.”
Malkiel believes that emerging markets offer the best prospects for both equity and bond returns over the next 10 years.
Whatever the specific mix of assets investors choose, they will do well to control the thing they can control: their investment costs.
“That is especially important in a low-return environment,” says Malkiel. “Make low-cost index mutual funds or ETFs the core of your portfolio and ensure that any actively-managed investment funds you purchase are low-expense as well.”
CNBC reports that near-zero interest rates aimed at pushing investors out of bonds and into stocks appeared to gain some traction as 2011 drew to a close, raising hopes that investors are ready to take on more risk.
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