VII #57 — Stocks Are Less Risky Than Certificates of Deposit

I’ve posted Entry #57 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Stocks Are Less Risky Than Certificates of Deposit.

Juicy Excerpt: Inflation is built into the numbers for indexers. The average long-term return for stocks is 6.5 percent real. At a time of 6 percent inflation, stocks would need to provide a nominal return of over 12 percent for the average long-term return to apply (as it must if productivity remains roughly equal to what it has been in the past). So the risk for Valuation-Informed Indexers is slight. And the big risk for CD owners does not apply for Valuation-Informed Indexers.

Comments

  1. azanon says

    I wish you wouldn’t use titles that are definitely true, if you’re going to make a statement with them. Your title certainly is not true now at P/E at 21. What’s crazy is, I know that you agree with me, yet I bet the chances are approximately 0 that the title will not be changed.

  2. Rob says

    Stocks are only risky today for those who buy them today, Azanon. The point here is that there is no law forcing you to buy them at these prices.

    Risk is uncertainty. Once we have identified the risk so that it can be avoided, the risk disappears.

    Say that you have heard that there may be sharks in a certain section of the ocean but there are also people saying that sharks are in that area only rarely. Swimming in that area is risky. There may be sharks!

    Now say that you can see the sharks from the shore and you jump in anyway. In that case, it’s not quite right to say that you were taking a risk by swimming there. You were certain to get killed. It’s not so much that swimming there is risky as it is that you were foolish or self-destructive.

    As we learn more about stocks, the risks of stock investing diminish. Shiller’s showing that valuations affect long-term returns reduces the risk by 80 percent, according to the historical data.

    Now, to those who do not yet understand this, the risk obviously remains. But we are in the process of changing this (I’m working on it! I’m working on it!). So stocks are today less risky than CDs in an intellectual sense and on the way to becoming less risky than CDs in a practical sense.

    To say that entire mouthful is a bit much for the headline. The news here is that stocks are today less risky than CDs in an intellectual sense since that did not used to be so. So that is what I chose for the headline. No, I do not intend to change the headline.

    I hope you are happy to hear the message even though you are not thrilled with the way it was presented. It’s a pretty darn exciting message for all stock investors!

    Rob

  3. azanon says

    Stocks are not just more risky for those who buy them today, they are more risky for those who own them too, as opposed to CDs. What other prices of stocks matter other than the price they are at today? That question is rhetoric, by the way.

    You can write a long and drawn out rebuttal all day long, and it won’t change the fact that your statement is wrong. Greeney would agree with you though, if that helps you feel better.

    Who’s side are you own anyway? I’m with Shiller. Stocks are most certainly, matter of fact (forget the sense), more risky than CDs today, and I am 100% confident Robert Shiller would agree with me. Granted, he and I perfer TIPS, but CDs, are also “less risky than stocks” and a better overall choice today.

    Look I realize you were probably just trying to be witty, but in this case the costs are just too high. Perhaps it’s instances like this that might explain why Shiller doesn’t respond back to you?

  4. Rob says

    Greeney would agree with you though, if that helps you feel better.

    I don’t know for sure that that’s so. But it seems to me that it is possible that it is so. And, yes, it would make me feel good to learn that that was indeed so.

    There are a number of points re which I am in strong agreement with my friend John Greaney and I am not a tiny bit ashamed to say so. I had lots of good times with John in past days and I have hopes of having more good times with him in future days.

    Rob

  5. Rob says

    Who’s side are you own anyway?

    I don’t see a need to be on any one “side,” Azanon.

    I’m a fellow posting his thoughts on stock investing on the internet. Like you. Like Greaney. Like Bogle. Like Shiller. Like all the rest.

    If I have to choose a side, I would choose the side of the humans. It would be fair to say that I would like to see the humans end up winners in this one.

    Rob

  6. Rob says

    That question is rhetorical, by the way.

    Fair enough, Azanon.

    I won’t respond to the question, given that it is rhetorical. I’ll spend some time thinking it over all the same. It might be that you are helping me to see things from a different angle here. I am certainly grateful to you for trying to beat some sense through my think head.

    Rob

  7. Rob says

    I am 100% confident Robert Shiller would agree with me.

    I’m not 100 percent confident either way.

    I am personally not even 100 percent confident that he has ever given any thought to the question.

    And I certainly do not intend any dig at Shiller with that comment.

    Rob

  8. Rob says

    I realize you were probably just trying to be witty

    I’m not trying to be witty, Azanon. I am trying to understand better how stock investing works.

    Rob

  9. Rob says

    Perhaps it’s instances like this that might explain why Shiller doesn’t respond back to you?

    I don’t personally believe that’s so.

    But it’s a fact that he hasn’t responded. So I suppose it is fair game for you to speculate as to why. I don’t think what you are saying here is 100 percent crazy. It seems possible to me that it is something along these lines that causes him not to respond.

    I don’t really think that’s so and I think it would reflect poorly on him if this turned out to be the case. So I would view it as uncharitable to say that I agreed with you. But I don’t quite feel that I can rule it out entirely.

    Rob

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