Prof Scott Cederburg: Long-Horizon Losses in Stocks, Bonds, and Bills (EP.224)
The Rational Reminder Podcast
Asset Allocation - What Are the Implications of Long Term Losses?
If stocks have a significant risk of real loss over long horizons, can you talk about the implications for asset allocation? So to some extent it's going to depend on what other options we have available. We are starting to more formally look into asset allocation as kind of our next project. It was actually supposed to be where our last project was going to go. And then it turns out with this much data that you have to get through and all these issues, it just turned into its own project by itself.
Are stocks and bonds good in the long game? What are the best long-term investment options? In this episode, we speak to Professor Scott Cederburg about the nuance surrounding the stock market, bonds, and other investment types in the long term. He has a Ph.D. in Finance from the University of Iowa and is currently the Associate Professor of Finance at Eller College of Management at the University of Arizona. His research focuses on the long-horizon performance of a range of asset classes and investment types and has published in high-ranking academic journals, making him the perfect person to speak to about the subject. We discuss the topic through the lens of several papers he has written on stocks, bonds, retirement savings, and return predictability. In our conversation, we unravel the nuance of the returns on long-term stocks and bonds, hear details about his research design, and learn how unanticipated events can affect the market. He also provides insight into the different biases surrounding long-term investments, the block bootstrap approach, reasons why the block bootstrap approach is needed, and why bonds and bills may not be the long-term investment you were hoping for. We also discuss the best options for investors regarding pre-tax and post-tax accounts and the differences between high-beta and low-beta portfolios. He also shares some basic steps for investors to help them protect their investments. Join us as we dig into the past to uncover the financial future with Professor Scott Cederburg.
Key Points From This Episode:
- We begin with Professor Cederburg describing his research design for his work investigating long-term returns on stocks and bonds. (0:04:20)
- Hear examples of how unanticipated events lead to impacts on stocks and bonds. (0:08:08)
- What the overall trend in the data was from his research on stocks and bonds. (0:11:05)
- Why considering different biases is essential for financial decision-making. (0:11:45)
- How the historical experience in the US stock and bond markets compare to other developed markets. (0:12:45)
- Details about the data he collected regarding domestic stocks and investors. (0:13:55)
- Learn how probable it is that domestic stocks will deliver losses in the long term. (0:16:41)
- Outline of the factors which tend to cause long-term stock losses. (0:17:36)
- What potential losses are in the long-term for international stocks. (0:18:58)
- How likely stocks will deliver catastrophic losses as opposed to traditional forms of loss. (0:22:15)
- Find out how much the probability of loss decreases with longer horizons. (0:23:59)
- The contribution of currency and domestic inflation to the trends in the data. (0:24:52)
- We compare how well international stocks hedge against long-term real losses in domestic stocks. (0:25:25)
- He shares how he thinks investors should approach the home country bias. (0:26:34)
- A rundown of the expropriations that exist in Professor Cederburg’s data. (0:27:34)
- We talk about long-term stocks and their implications on asset allocations. (0:28:48)
- How wide the distribution of long-run stock payoffs are. (0:29:28)
- Discover how likely bonds and bills are to real losses over a long period. (0:30:16)
- Breakdown of what the distribution looks like for bond returns. (0:31:52)
- Whether bonds act as a hedge against poor stock returns. (0:33:24)
- Common economic conditions that explain the poor long-term returns for stocks and bonds. (0:34:58)
- Ways in which the results can be used to make predictions for the economic future. (0:38:36)
- Professor Cederburg tells us if stocks are safe or risky in the long term. (0:40:23)
- He unpacks mean reversion in the full-time series compared to the block bootstrap approach. (0:41:27)
- Why emerging markets were not considered in the study. (0:43:55)
- Advice for investors given the findings of his study. (0:45:00)
- We discuss the applicability of the findings within a contemporary market setting. (0:47:04)
- Which variables need to be considered when deciding between a pre-tax or post-tax savings account. (0:49:19)
- Factors that make a pre-tax and post-tax account valuable. (0:50:41)
- Hear the investment type most exposed to future tax schedule uncertainty. (0:54:50)
- Whether using a post-tax account can build resilience to tax uncertainty. (0:56:29)
- Simple rules for listeners to help them optimize the location of their savings. (0:59:08)
- How the simple rules compare to the optimization analysis performed for the research paper. (1:01:40)
- Risk-adjusted performance for high beta and low beta portfolios. (1:03:02)
- We learn what the implications are for someone investing in low-beta assets. (1:05:58)
- Professor Cederburg shares his definition of success. (1:09:17)
Links From Today’s Episode:
Global Financial Data — https://globalfinancialdata.com/
‘Stocks for the long run? Evidence from a broad sample of developed markets’ — https://www.sciencedirect.com/science/article/
‘Tax Uncertainty and Retirement Savings Diversification’ — https://www.sciencedirect.com/science/article/
‘Does it pay to bet against beta? On the conditional performance of the beta anomaly’ — https://onlinelibrary.wiley.com/doi/abs/10.1111/jofi.12383
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