William Bernstein on stocks, bonds, and the economy
Jul 18, 2023
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Discussion on indicators of a potential recession, the stock market's rebound, and the impact on investments. Importance of staying invested during market crises. Insights on yield curve, recession indicators, and investment strategy. Comparison between US stock market and bond market performance. Dangers of forgetting historical market trends. Arguments against including corporate bonds in portfolios. Caution about finance and social media in investing.
Accurately forecasting economic trends is difficult, so long-term strategies focusing on staying invested and diversification are recommended.
Successful investing combines mathematical analysis with an understanding of human behavior and psychology, avoiding common biases for better decision-making.
Staying invested and resisting the urge to time the market during downturns leads to long-term investment success, taking advantage of buying opportunities and compounding growth.
Deep dives
The importance of understanding the economy's outlook
The podcast discusses the uncertain relationship between the economy and financial markets. While the current state of the economy appears strong, leading indicators are flashing red, suggesting a potential recession within the next year. However, the speaker highlights the difficulty of accurately forecasting economic trends and advises against trying to time the market. Instead, long-term strategies that focus on staying invested and following a diversified portfolio approach are encouraged.
Investing as a mixture of math and psychology
The speaker emphasizes that successful investing is a combination of mathematical analysis and an understanding of human behavior and psychology. By acknowledging the importance of both aspects, investors can make informed decisions and avoid common psychological biases that can lead to poor investment choices. The speaker highlights the value of financial and economic history as a tool for understanding market behavior and making wiser investment decisions.
The importance of compounding and staying invested
The podcast emphasizes the power of compounding and the importance of staying invested to achieve long-term investment success. It is advised to avoid interrupting compounding by trying to time the market during downturns. The speaker recommends maintaining a long-term investment strategy and resisting the urge to sell during market declines, as those periods often present buying opportunities. By focusing on long-term investment goals and having the discipline to stick to the strategy, investors can achieve better outcomes.
The role of risk in investing
The podcast highlights the various dimensions of risk in investing, beyond just volatility. It emphasizes the severity and sustainability of potential losses as crucial factors to consider. The importance of understanding the risks associated with different asset classes, such as corporate bonds, is emphasized. The speaker cautions against overreliance on corporate bonds, citing their historical underperformance in downturns, and suggests focusing more on diversified portfolios that include safe government securities.
The value of diversifying investments and avoiding market timing
The podcast promotes the benefits of diversifying investments across asset classes and avoiding market timing. It highlights the historical advantages of diversification and recommends investing in a mix of stocks and safe government securities. The speaker discourages trying to time the market by predicting peaks and troughs, citing the difficulty of consistently doing so. Instead, a long-term investment approach with a focus on low-cost, broad-market index funds is recommended.
These are confusing times for the economy and for financial markets—and for the relationship between the economy and financial markets.
At the moment the economy is doing well. The labor market is still creating hundreds of thousands of jobs each month. Unemployment is low. Inflation has come down over the past year. And economic growth has been stronger than a great many economists and others had forecast heading into the year.
But that’s just how the economy is doing right now. What about six months from now? Or a year? Forecasting is always hard, and it may well be impossible. But economists sometimes look at “leading indicators” that are meant to give at least a sense of where the economy is headed. And some of those are flashing red, suggesting we might be headed for a recession in the near future. Then again, those same indicators have looked bad for a while now, and still the recession is nowhere in sight, so who knows.
Meanwhile, look at the US stock market. It collapsed last year. But it’s come roaring back this year—and this despite the Federal Reserve continuing to raise interest rates aggressively. Is the stock market now overpriced, too expensive? Is it underpriced, a good time to get in? And what happens if we do go into recession?
What about bonds and other markets? What happened to crypto and all those meme stocks?
Returning to the show to discuss all this and more is William Bernstein. Bill is the author of no fewer than three of Cardiff's favorite books on finance and the economy, including “The Four Pillars of Investing”, which just came out in a second edition roughly two decades after the first. It has all new updated information, data, and charts, plus the lessons learned in the intervening years.
