I believe the difference comes down to whether your goal is to preserve wealth or make it. As a side-note, a few years ago both Merrill Lynch and Berkshire Hathaway bought annuities to satisfy their defined benefit pension liabilities. Now before you email, I know there are benefits from not having to comply with ERISA (tell me about it) but the interest rate on both annuities was around six percent.
What does that tell you about their respective market return expectations? For comparison, CalPERS is budgeted for 7.75% which may be a bit high considering the losses they've been booking. In CalPERS case they can always fall back on the taxing power of the state of California and the governmental subdivisions therein. Oh joy.
That's about the craziest thing I've ever heard!" shouts Jeremy Siegel through the phone when I mention the headline of this story. "I mean, what's the rationale for anyone saying that?" I had called up the Wharton professor because he's one of the high priests of buy-and-hold investing. In his classic book, Stocks for the Long Run, Siegel analyzed 200 years' worth of U.S. market returns and concluded that patient, consistent investment in stocks over a long period is the most effective strategy for wealth creation among regular folks.
It's a message that makes a lot of sense to people under normal circumstances. But lately, of course, the market has been anything but normal.
As Siegel and I were speaking in mid-October, the Dow was down some 39% from its high a year earlier. Investors were taking their money out of equities by the billions. The S&P 500's ten-year return was -11% (with dividends included, it was up a measly 5%). Plenty of people had suddenly begun to ask themselves whether the idea of long-term investing was a sham....MORE