Download - IndexUniverse.com

Clearly the biggest asset that any country in the world has
today is their human capital. Another issue plaguing the U.S.
is that other countries are investing more and more money in
their human capital relative to the U.S. The U.S. is beginning to
resemble General Motors in 1980. After a prolonged period of
growth, perhaps the U.S. has reached its maturation phase.
JOI: What’s the biggest danger/opportunity that you see ahead
for investors during the next five years?
Garnick: There are two primary issues keeping me up at
night. The first is that households will forget how to save
responsibly. Right now the savings rate in households has
jumped pretty dramatically, from less than 1 percent to 5-10
percent. The danger we face is that the moment economic
stability returns, people stop saving and immediately go on
a spending spree again.
The second issue is that people don’t retool themselves
for the new world. For example, I would be thrilled if young
women would stop saying they want to grow up and be
cheerleaders and start saying they want to grow up and
become biochemical engineers. That’s at the core of one of
the greatest dangers we all face—50 percent of the “smart”
people still want to come work in finance. Society needs
those truly remarkable people to place their efforts into
other industries if we hope to regain long-term growth.
Collectively, we have a responsibility to steer them into
fields where they can make a difference.
Jeremy Siegel, Senior Investment Strategy
Adviser, WisdomTree; and Russell E.
Palmer Professor of Finance, Wharton
School, University of Pennsylvania
JOI: Is buy-and-hold investing dead?
Jeremy Siegel (Siegel): Absolutely not! Just
because we have had two major bear markets in the last decade
does not nullify the buy-and-hold philosophy. Although stocks
have had poor returns over the past decade, they have had
annual returns over 8 percent over the past 20 years, and over
11 percent over the past 30 years, far outdistancing bonds.
JOI: Should investors be concerned about inflation during the
near term? If so, how can they protect themselves against it?
Siegel: I do not think that there will be any significant inflation
over the next two years, but after that, I expect inflation
to average 3-4 percent per year after 2012. Stocks offer an
excellent hedge against such moderate inflation. The government’s
inflation-indexed bonds could falter if real interest
rates rise, which I expect.
JOI: Have you adjusted your investment philosophy during the
last two years?
Siegel: The last two years have hammered home why stock
investors earn such a large equity premium over the long
run—in the short run, stocks are very harrowing investments!
Many investors settle for meager returns in bonds rather than
suffer the volatility of stocks. In the long run, these risk-averse
investors will fall far behind those who stick with equity.
JOI: What’s the biggest danger/opportunity that you see ahead
for investors during the next five years?
Siegel: Global growth prospects are excellent, and investors
must hold globally diversified portfolios. Over half of the
world’s equity assets are outside the United States, and that
fraction will grow in the future. The biggest threat to growth
is sharply escalating energy prices, such as we saw in 2007
and the first half of 2008.
Gus Sauter, CIO, Vanguard
JOI: Is buy-and-hold investing dead?
Gus Sauter (Sauter): Nothing that has happened
over the last couple of years would
lead us to at all conclude that a buy-and-hold
strategy isn’t as valid today as it was two years
or 10 years ago.
In fact, unless you can see the future—unless you know the
future—buy-and-hold makes all the sense in the world. Really,
the advantage of buy-and-hold is that it removes the temptation
to abandon a long-term plan at just the wrong time. When the
markets are going down, we all feel some degree of fear and
some desire to change our strategy and get out of equities. Too
frequently that happens at or near the bottom of the market.
At the same time, when markets are moving higher,
there is natural human greed that kicks in to make us want
to double up on our bets, or increase our equity exposure.
What we’ve found is that human behavior leads us to make
these changes at just the wrong times. So, a buy-and-hold
strategy helps prevent us from acting in a knee-jerk fashion
and under-performing because we’re making all the wrong
moves at the wrong time.
JOI: Should investors be concerned about inflation during the
near term? If so, how can they protect themselves against it?
Sauter: I don’t believe that inflation is a near-term problem,
for a couple of reasons. First, inflation occurs when the economy
becomes overheated and resources are in full demand.
But, in fact, we’re looking at just the opposite right now.
There is a lot of slack in the economy, capacity utilization is
in the low 70 percent range and unemployment is pushing
through 10 percent. Resources are ample and we can really
increase production without it being at all inflationary.
Secondly, I think a lot of people are concerned about
inflation because of the unprecedented actions of the
Federal Reserve—essentially, the more than doubling in the
size of the Fed’s balance sheet. I would note, however, that
while the monetary base, which the Fed controls, has more
than doubled, the money supply that we spend—the broad
measure of the money supply—has not at all increased out
of the ordinary. Yes, the monetary base is the first component
of money supply, but, really, what we spend is a much
broader aggregate than that, and that broader aggregate
has not expanded because the financial system still is not
functioning properly. As banks get on firm footing, it will be
necessary that the Fed sterilizes its balance sheet and pulls
it back in. If the Fed isn’t nimble, and doesn’t restrict its own
balance sheet while the banks are starting to expand again,
www.journalofindexes.com January/February 2010
37