Finance: Stocks Vs Treasury Bonds

Finance: Stocks Vs Treasury Bonds

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Historically speaking, stocks have been found to be no more risky than Treasury bonds. Over the past twenty years vast research has been done on this subject. Jeremy Siegel of the University of Pennsylvania’s Wharton School stated that, “The safest long-term investment for the preservation of purchasing power has clearly been stocks, not bonds.” Since the mid nineteen twenties, company stocks have average annual returns close to 11%, while on the other hand, Treasury Bonds only return with a little over 5%.
     Currently stocks are on the rise. Since 1982 the reason for this is the declining risk premium. The return, or “risk premium,” that is required is much less. This is for several reasons. Investors have realized not to be so fearful of the great unpredictability of stocks. Instead of dropping stocks in the short run, investors are learning to hold out for the long run to see huge benefits.
Secondly, Americans are now keeping stocks in accounts that require long-term holding, such as retirement accounts. Also, businesses are becoming much more efficient and the chance of undergoing devastating turn-arounds in a recession are much less. The tax environment is more generous, foreign threats have ceased dramatically, and the government management has vastly improved.
The bottom line is that the risk of investing stocks is much less than it ever has been before. The level of the risk premium is heading towards zero, while currently holding at 3%. That 3% is much better than the historical average of 7%.
James K. Glassman and Kevin A Hassett, authors of the book, “Dow 36,000,” claim that the prediction of the Dow reaching 36,000 is not out of the realm of possibilities. If the earnings grow in the long term at the same rate as the GDP and treasury bonds are below 6%, then it is very possible for the Dow to hit a level of 36,000. One critic of “Dow 36,000,” Burton G. Malkiel, stated that the rise in stocks that has been occurring is the beginning to an adjustment that “will only be complete when stocks and bonds are priced to offer equivalent returns, and that implies a level of 36,000 for the Dow today with a price earnings multiple of 100.”
So the question remains at whether the authors of “Dow 36,000” are correct or incorrect about the arguments and predictions that they make in their book. They are correct in what they predict in their book, but they need to make sure to not lead some not-so-experienced investors down the wrong road of deception.

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“Dow 36,000” correctly explains that historically the risk premiums have been too high.
At the same time critics also nag at the fact that it is hard to believe that in the long run stocks aren’t any riskier than government bonds. There are also many factors that do definitely lower the risk premium including free markets, stable economy, and the end of the Cold War, but at the same time no one can predict what will happen in the world economy at any moment.
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