Are Equities Dying? – Jeremy Siegel’s Response to Bill Gross

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Back in August, Bill Gross claimed that the “cult of equity” is dying.  (See our related blog post)  In his commentary, Mr. Gross criticized Jeremy Siegel’s book, Stocks for the Long Run, because Siegel had researched the returns of the stock market and had found the long-term real returns in the stock market are 6.6% per year after inflation.  Siegel defended his 6.6% stock market real return research in his latest commentary and commented on how “Gross’s support for his claim is based on faulty data and bad economics.”

In his commentary, he lays out his theory in three points:

  1. Stocks can have a real return greater than the real growth of the economy.
  2. The 6.6% real return is not “freakish.”  Other research has demonstrated a similar return prior to 1871, going back as far as 1802.
  3. Stock returns have not been boosted because of the “fall in the share of national income going to wages and salaries.”

As Mr. Siegel sees it, stocks will “very likely match if not exceed their historical return.”  Regardless of whether inflation takes off, stocks are a better place to be invested than bonds because they are better inflation hedges over long periods of time.

The core of Mr. Siegel’s thesis is that stocks are still the main drivers of wealth accumulation.  While quite risky if held for short periods of time, they offer the greatest chance of building substantial wealth for a successful retirement. They have outperformed every other asset class over the long run.   This type of applied analysis should carry more weight for an evidence-based investor than the claims put forward by Mr. Gross without any empirical backing.

Working with a Financial Advisor to determine your optimal personal exposure to equities is an important step in the financial planning process.  At Empirical Wealth Management, we place a great emphasis on connecting each client to the right portfolio through a self discovery process to.

For more on possible equity returns over the next decade, please see our third quarter newsletter from this year.