I don’t fly very well. For many years I racked up thousands of frequent flyer miles jetting all over the U.S. and many places in Asia. I even flew first class a lot back in the go-go 1980s when Wall Street was a sexy place to work. I once made the mistake of reading Michael Crichton’s “Airframe” (about an airplane disaster) on a 747 bound for Tokyo. Just as the plane was nearing take off speed, I heard a loud “pop” on the left side of the plane. One of the engines had blown out. The pilot immediately slammed on the brakes, and instead of ascending gracefully into the blue, we stopped awkwardly on the JFK tarmac. Shortly we were surrounded by fire and rescue vehicles.
Ever since then, take offs have become white-knuckle times for me.
So this month when I needed to fly out West to take my son to college, I had to face again another take off. I have discovered that if I count to myself, slowly and silently, I have very little angst as the plane leaves the ground. I have also discovered that most large jets reach take off speed about 27 to 33 seconds after they begin to accelerate. Also, the audible tone designating that it’s OK to use approved portable electronic devices occurs 167 to 210 seconds after the start of the flight. I can’t help it; I’m a numbers guy…
Once airborne, my nerves settle down quickly and I truly enjoy looking at our fine country from cruising altitude. Up there the world seems very different. I am always impressed how big and unpopulated the nation is – something I rarely feel driving on highway 66. I see farms, towns and forests of all sizes and shapes. I see lots of open spaces. The change in perspective is dramatic; and it allows me to see things differently.
Working day to day in the capital markets is sort of like driving on the highway. It’s easy to get bogged down by the immediate, here-and-now stuff – by the noise, the traffic and the frustration that comes with this daily grind. And lately, the market seems to be dominated by the latest economic data point, “expert” opinion about this or that, or some new technical fear (the Hindenburg Omen, for example). But that’s not how long-term investors should view the market. They really should be looking at the market from 30,000 feet – at the big picture; at things as they really are.
But how can we do this?
Every once and a while, an excellent piece of research crosses my desk that can provide this perspective. The latest one, titled “A Study of Real Real Returns” comes from our good friends at Thornburg Investment Management (http://www.thornburginvestments.com/). In this report they look at 20- and 30-year returns for all of the major asset classes accounting for the real-life impacts of expenses, taxes and inflation on total returns. Why these long periods of time? With advancing longevity, it’s reasonable to assume that investors will not only accumulate saving for 30 years or more while working, but they may also need income from those savings for 30 years after retirement.
So what asset classes did the best in this study? Stocks and municipal bonds.
Stocks, the capital markets pariah of the moment, have proven to be the best performing asset class over long periods of time. Critics of stocks point to their performance over the last 10 years to “prove” that stocks will underperform in the “new normal.” I would note that stocks have underperformed (bonds, cash, whatever, etc.) only twice in the last 100 years: the 1930s and the 2000s. For the decade of the 1930s, the S&P 500 was down 0.3%. For the ten years ending December 31, 2009, the market fell 9.1%. Note that both of these periods begin at a peak of equity prices, valuations and bullish sentiment. I suppose any numbers series will compare unfavorably when compared to the peak of that series. Lost on the current audience is that stocks performed well for the six decades in between these two bad ones, with 3 of these decades posting gains of at least 400% for the S&P 500.
Municipal bonds do well due to their ability to avoid taxes.
So despite the current loathing of stocks, the smart folks at Thornburg conclude their report with these wise words, “[our]… study confirms that the highest returns come from the more traditional asset classes – common stocks and municipal bonds. Asset classes that have traditionally been associated with inflation protection have not generated significant positive real real returns over long periods of time.”
“Over the 20 years that Thornburg has conducted this study, the results have been consistent. There is no reason to think that they will change significantly going forward. The two primary unknowns, inflation and tax rates, will remain… A simple asset allocation among the highest real real turn asset classes, accompanied by a reasonable withdrawal rate and spending policy, may provide investors with the best chance of sustaining their portfolios and preserving wealth going forward.”
That’s what I’ve been trying to say…