I’ve been letting lots of people know about my article reporting on The Silencing of Academic Researcher Wade Pfau by The Buy-and-Hold Mafia.
Yesterday’s blog entry reported on my correspondence with Economics Professor Valeriy Zakamulin. Set forth below is the text of the e-mail sent by Valeriy in response to the e-mail of mine detailed in the earlier blog entry:
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Rob:
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My comment on the following:
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First of all, we know about this only a-posteriori.
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Second, about year 1980, you probably forget that at that time the short and long interest rates were sky-rocketing. You could get about 10% annual completely risk-free return from CDs. In 1982 the yield on 10-year government bonds approached 15% annual. This was much more than one could get from risky stocks, the prices of which had been decreasing from about 1966. No wonder that the PE10 dropped to about 7 at that time: investors sold stocks and bought bonds instead. And note that it was completely rational!
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Third, when you talk about stock risk, you’d better mention that you are talking about long-run risk, not short-run. If you bought stocks in 1980 and held them till 1982, you would lose. Of course, if you bought stocks and held them for about 10-20 years, you would greatly multiply your initial investment.
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I see that you focus mainly on stocks and forget about secular trends in bonds. Bonds, as stocks, also have secular bull and bear markets, and stock returns depend on whether it is a secular bull or a secular bear market in bonds. How much to allocate to bonds also depends on the current secular trend in the bond market.
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Valeri
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I replied:
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Valeri:
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