Historically low interest rates. Massive government stimulus. Rising standards of living creating commodities shortages. Turmoil in the Mid East and energy uncertainty. The recent “lost decade” for equities. Investors are rattled, and many expect an inevitable rise in interest rates, if not runaway inflation. We are all looking for advice and perspective, which is available in abundance, in up-to-the-second updates.
I recently found some perspective from a less likely and less expensive source. I was surprised to learn that Burton Malkiel, author of the efficient market classic A Random Walk Down Wall Street, published in 1980 The Inflation-Beater’s Investment Guide, now out of print. I tracked down a copy (for less than $15), because I needed to know what an efficient markets apostle was predicting in 1980, and whether anything relevant today could be learned from such a time-specific book. Should an efficient markets apostle even be making predictions?
It’s important to remember the context for investors in 1980. The 1973-74 bear market was recent history. In 1979, corporate bonds lost money and inflation was a staggering 13%. Smart investors bought precious metals, which had returned 35% per year from 1973-1979. It was an uncertain time, and there was a good case for reigning in risk, and maybe concentrating in cash and short term fixed income to protect against more inflation and get some benefit from those high rates.
In his 1980 book, Malkiel’s punchline was to stay invested, especially in equities. He accurately predicted double digit positive returns for all major asset classes, though he encouraged investors to stay away from gold and other “things”. With minor exceptions, as we now know, he was right. He often references the lessons learned from the Depression and the ensuing decades to build his thesis, and it’s interesting to note that the 1970s are almost as close to us today as the Depression was to Malkiel.
The 1980s started in a dismal, confusing way, but an investor would have earned the following returns during the decade:
• Blue chip stocks: 17.6% (vs. Malkiel’s forecast of 15%)
• Riskier stocks: 14.5% (vs. forecast of 16-18%)
• Corporate bonds: 14.9% (vs. forecast of 11.5%)
. . . and precious metals produced 5.5% annual losses (Malkiel declined to forecast gold but described the risk level as “enormous”).
How is this book relevant today? It provides yet another data point that staying invested with a balanced portfolio through thick and thin has a good chance to yield a satisfying result. In fact, going all the way back to 1930, and using each decade as an arbitrary measurement interval, a balanced investor (25% US equities, 25% non-US equities, 25% treasuries, 25% corporate bonds) never lost money (over a 10 year period), earned 8% annual returns with less than half the standard deviation of equities, and beat inflation in every decade except the 1940s. An investor who maintained balanced portfolio risk and stuck with a plan through the Depression, World War II, the Cold War, the oil embargo, dramatic inflation, several steep stock market drops, and everything since then, who was not smart enough to time the cycles, still came out ahead.
Simple, timeless conclusions from a dusty old inflation book!
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