As of April 2, 20011, the outstanding public debt of the U.S. was in excess of $14 trillion. Your share of this debt is more than $46,000. The U.S. debt level is approximately 90% of its economic output.
Many investors view the rising debt as having major implications for their U.S. based investments. On the surface, this concern makes perfect sense. Why would you want to invest in a country that can't live within its means? Isn't it obvious the whole deck of cards is about to come crashing down?
Marlena Lea, a Vice-President of Dimensional Fund Advisors examined this issue in a thoughtful research paper. Her research considered the economic and investment ramifications of fiscal deficits.
As expected, she found that deficits are related to higher long term interest rates. This makes perfect sense. As deficits increase, the risk of default also increases. It becomes more expensive to borrow money.
High deficits may also stifle long-run economic growth. No surprise here. Budget deficits decrease national savings, which reduces investment in the domestic economy and increases foreign borrowing. Lower domestic investment leads to lower growth.
You would think high interest rates and slow growth would be the perfect storm for investors. You would be wrong.
Ms. Lea looked at the average annual returns in high and low growth countries in developed markets from 1971-2008. The low-growth countries had an average annual return of 13.52%, compared to 12.90% for the high-growth countries.
The difference was more stark in the returns of countries in emerging markets. For the period from 2001-2008, the average annual return of low-growth countries was 24.62%, compared to 19.77% for high-growth countries.
Ms. Lea concluded that deficits do not predict stock or bond returns and that low future economic growth does not mean low future stock returns, which is precisely the opposite of what most investors believe.
What about currency depreciation? Many investors believe large fiscal deficits are a precursor of currency depreciation. This concern makes sense. The likelihood of inflation and default risk could cause investors to flee the dollar for safer, more stable currencies. The data does not support this view. U.S. deficits increased significantly from 1970-1990. The dollar got stronger, not weaker. The academic data indicates that exchange rates move randomly. Fortunes have been lost in the futile effort to predict currency returns.
Ms. Lea is a highly credentialed academic. She has a Ph.D in finance from the University of Chicago, an MS in agricultural and resource economics and a BS in managerial economics. Most investors would not consider having heart surgery performed by someone without stellar credentials. Yet, they entrust their life savings to their friendly "investment professionals" who base their recommendations on little more than the direction of the wind on a given day. Many of them have no formal training in economics or finance.
There is a vast amount of peer reviewed academic literature which debunks the common investment myths you hear in the financial media and from your "market beating" broker or advisor. Investing your money responsibly requires some effort to familiarize yourself with it, or with books summarizing this research. As for the latter, my books and those by John Bogle, William Bernstein, Burton Malkiel, Mark Hebner, Larry Swedroe, David Swenson and Allan Roth are a good place to start.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.
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Inder Sidhu: Mixed Economic Signals Call for Unambiguous Action: Leading in Confusing Times
Skepticism in both the hard news and financial press has sadly, and to our detriment as a society, become a lost art.
If this 30 something young person is so smart to advise me, why isnn't he rich?"
investment is worth $49.00 today.
If you purchased $1,000 worth of AIG shares at its peak, your investment
is worth $33.00 today.
If you purchased $1,000 worth of Enron shares at its peak, you have
$0.00 today.
But ...
If you purchased $1,000 worth of beer a year ago, drank all of it and
saved the aluminum cans for recycling, your investment is worth $214.00
today.
My new retirement plan is a 401-Keg.
I am suspicious of Ms. Lea's 2001-2008 findings. That is the time frame when an investment in the S&P 500 would have returned 0%, so it is hard to imagine any slow or fast growing markets averaging 20%-25%. Am I off by a year or two? Pardon me, I didn't mean to reveal that markets can stagnate for a decade at a time.
http://genxfinance.com/the-lost-decade-of-investing/
The pentultimate champion of this long-run investment strategy is the Vanguard group of mutual funds, founded by the greatest pro-individual investor of his generation, John Bogle. Mr. Bogle's simple, yet elegant, investing philosophy, then and now, is to invest in a broadly diversified array of stocks using very low-cost index funds, and, to re-balance the stock-bond-other asset mix about once per year. This strategy works, it has worked for me for over 25 years, and, has delivered to me portfolio returns that are the envy of many of my friends and associates.
moneywatch.bnet.com/economic-news/article/why-it-wasnt-a-lost-decade-for-investors/375568/
Equity asset classes should include US Large Cap, US Small Cap, US Large Value, US Small Value, US REITS, International Large Cap, International Small Cap, International Large Value, International Small Value and Emerging Markets. Bonds should be short and intermediate term.