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Ultra Long-Term Investing With Jeremy Siegel – Investopedia

Let's get set up for another busy week ahead. The January nonfarm payrolls report showed 467 thousand new jobs added last month, way higher than estimates for gains of around 150 thousand. The unemployment rate crept back up to 4% from 3.9% because more people said they're looking for work. Is the labor market stabilizing at long last? Keep in mind, 22 million U.S. jobs were lost between March and April of 2020. 19.1 million jobs have been added back, now 2.9 million below that high, and there are 10.9 million job openings in the United States right now.
Investors will have little time to keep scratching their heads from last week's shocker of a jobs report because new inflation numbers are coming this week. The Department of Labor will deliver the read on consumer prices on Thursday, and economists are forecasting those prices to rise 7.3%. That would be the highest rate of inflation since 1981. What is inflation doing to consumer confidence? It fell to a 10-year low last month, and we'll get a fresh reading on it this Friday, when the University of Michigan will release a preliminary reading of its Consumer Sentiment Index for the month of February.
Jeremy Siegel is the Russell E. Palmer professor emeritus of finance at the Wharton School at the University of Pennsylvania. Jeremy is also the bestselling author of several books, including Stocks for the Long Run, and a frequent contributor across multiple business media outlets. Additionally, he was an advisor to WisdomTree Investments and is the co-creator of the Siegel-WisdomTree Longevity Model Portfolio, which was designed to outperform a traditional 60/40 portfolio.
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The past few weeks have put investors' patience and resolve to the test. A correction in the Nasdaq and the Russell 2000, 1,000 point intraday swings in the Dow industrials, the fading of meme stocks and biotechs, you name it. One test after the other. Long-term investors know to ride these waves out. But no matter how patient you are, no matter how long your time horizon, volatility and the lack of visibility ratchet up anxiety and awaken our animal spirits. But what if we really leaned into the long term? What if we zoomed way out and looked at the macro trends that are actually more important than market cycles than the daily ticks of the market?
Our guest this week is the ultimate long-term market voyager. Jeremy Siegel is the Russell E. Palmer professor of finance at the Wharton School at the University of Pennsylvania. He's also the co-creator of the Siegel-WisdomTree Longevity Model Portfolio with WisdomTree. He's a bestselling author, including his epic book Stocks for the Long Run, which is in the Investing Hall of Fame. He's a frequent guest across business media, and he is our very, very special guest on the Investopedia Express. Welcome, Professor Siegel.
Jeremy:
"I'm happy to be here, Caleb."
Caleb:
“I’ve been following your work for so many years and so honored to have a few minutes with you to share with our listeners. But let’s talk about how investing through the pandemic changed the way we think about investing for the long term. Everything feels so compressed these days. Markets correct then reversed then fall apart, all in a matter of days or weeks. Is this normal?”
Jeremy:
“Well, the pandemic certainly was not normal, once in 100 years. I have to go back to the Spanish flu, so that was very unusual. And what was also very unusual was the tremendous amount of fiscal and monetary stimulus. I think too much. And if you’ve been following me, I said way back in 2020, we’re going to have inflation in 2021 and beyond. And I think that that is definitely what we’re seeing now. But yeah, money is a stock’s a good friend until the Fed finally decides to step on the brakes, and they’re doing so extremely slowly at this point.”
Caleb:
“Yeah. Well, we all know the narrative by now, and I’ve been listening to what you’ve been saying about this. The Fed’s taking the easy money away. It plans to raise interest rates three, four, five, maybe six times, shrink its balance sheet, all in an effort to cool that inflation and let the economy walk on its own two feet again. I’ve heard you say the Fed’s too late to the party or it hasn’t showed up with enough water to cool down the economy. Explain that.”
Jeremy:
“Yeah. It seems very clear to me… if you take a look at the Fed’s long-run Fed funds rate they’ve had for many years, said it’s 2.5%. That’s supposed to be a Fed funds rate with a 2% inflation and a normal labor market. Well, now we have a 7% inflation. And as Chairman Powell himself said, one of the strongest labor markets in history, and we’re talking about going up to 1%. That just doesn’t make sense to me. We’ve got to raise the interest rate more if we want to slow this inflation down.”
Caleb:
“So, raising the interest rates more. We haven’t even raised it yet and markets have completely freaked out just over the past several weeks here because, again, that easy money is going away and we’ve been living in this ultra-low interest rate environment for the past couple of years. But dial it back even longer, like I know you like to do, these are very, very low interest rates. We’re not even close to where we were in the 80s or the 70s. So, that has also been the wind in the sails of the technology sector, growth stocks. But value stocks are finally in favor after about 12 years of riding in the back of the truck. Does this rotation have legs? Are we in a really new supercycle here where value is going to trump growth for a little bit?”
Jeremy:
“Well, I hope so, but I do think it’s a little premature. I mean, we had a big value move from September of 2020 until March of 2021 that was actually bigger than what we’ve had in January. Now, I do think that the circumstances, rising rates, reopening the economy, search for yield that’s inflation protected, which is basically what stocks offer, will give value stocks their boost. I think that rotation is here, but I’ve called it before prematurely, so I’m showing I’m going to bet my life on it. But I think the conditions are very favorable for a value rotation in 2022.”
Caleb:
“I don’t disagree. But if you look at the way history and the history of the markets play out, that seems to be the way it might play. But things are so different these days, Professor Siegel. Markets, again, they move so quickly right now, from a reversal in bear market, bull market correction, back to growth again. Are investors, especially this sort of new class of investors, so addicted to technology stocks and to growth stocks that no matter what, they’re always going to have that propensity for it, and they don’t even think about value stocks in the way that an investor my age or your age might think about it?”
Jeremy:
“Yeah, that’s true. There’s two stories here. One story is technology has delivered, and I’m talking about the Microsofts and talking about those that are in the S&P 500, you have to have four consecutive quarters of earnings, I’m not talking about those are selling at 500 times projected revenues with no earnings. Those, of course, did get smashed late last year and in January, down 50–70%.”
“So, we’re talking about the established tech, and they have delivered earnings growth that is remarkable. They have taken on premiums that are high, not crazy, but certainly high. The pandemic certainly has been a favorable trend for technology as we all went to Zoom and went to the stay-at-home technology type of products. So, this is different than the crazy boom of the dotcom era, where then technology got much more out of line with its earnings growth, even the S&P technology, than today.”
“That said, we still have a pretty extreme valuation difference between growth and value. Seems like every 25 years, Caleb, this comes about. The mid-1970s, we had the Nifty Fifty, institutions piled into the growth stocks at that time. Then that faded quickly. And then, of course, 25 years later, that was the dotcom boom. Now, nearly 25 years later, we had this boom. This is the best supported of all the booms but still, I think, is a stretch. We’re not going to have the Nasdaq open 5,000 to 1,000, which is an 80% drop. But I did come on the air, say that I did think that Nasdaq would go into bear market territory and S&P into correction territory. I’m not predicting anything like what Jeremy Grantham is saying and I’m saying this because I am of the belief that the Fed is going to be forced to tighten more than what the market now think.”
Caleb:
“Let’s talk about investing broadly in the 60/40 portfolio, which I grew up with. I know you grew up with, you’ve written a lot about it. This is where a lot of people, especially my age and older, have sort of placed their money. This is how they’ve allocated. Is that dead, given the environment we’re in?”
Jeremy:
“Yeah, and it is. And it’s really interesting too because I am writing right now the sixth edition of my book, Stocks for the Long Run, and a whole big section on the 60/40 portfolio and whether it is still right. And if you look at the evidence, it is not sufficient. In fact, and it was really surprising myself. I did that Monte Carlo simulations of retirement portfolios, which is often the 60/40. And it turns out that with today’s forward-looking stock and bond returns… and I was really even pessimistic about bonds, giving them a 4.5% real rate of return, which is 2.5% below its long run average. But we know that bonds are going to have negative real rate rates of return. I mean, we we see that in the text. It turns out that the probability of running out of money where a given rate of withdrawal is actually 80–100% stocks. You minimize that probability, and always by going more towards bonds, the income is so poor that the probability that you’re going to run out of money is actually higher. And so with a low rate world going forward, and I do think stock and bond returns are going to be lower than their historical average, it turns out you need more stocks in your portfolio, not less, if you want to achieve a certain withdrawal plan.”
Caleb:
“And then it becomes all about diversification and picking the right sectors and finding the right timing and the right cycles. But Professor, bear markets sell off. These are not bugs of the stock market, not features. As you know, you’ve been writing about this for years and studying this for years. But they often provide the foundation for really strong rallies that can last for years. Is that what might be happening here, the laying of a new foundation for another cyclical bull market? Or are we just unwinding all of the madness and all the liquidity that’s come into the economy and into the market in the past couple of years?”
Jeremy:
“You’re perfectly right. People say, ‘Why is, with something we economists call the equity premium, why has history shown stocks so superior to bonds and fixed income? And it is the fact that we have to live through volatility. That’s a scary thing, and we get a lot of people that are just scared out of it. When it happens, you gotta, say, ‘Listen, this is a feature, as you said, of capital markets and has been for over 200 years.’ And my god, it goes back 1802. Now we have 220 years. Bear markets have been part of it. And as we speak today, we’re not even in a bear market. We’re not even in an S&P correction yet. So, one could be scared. And if you were in the meme stocks and you were in those mega high fliers based on revenue, yes, you’ve been in a massive bear market for six months. But if you’ve been in the S&P 500, you’re not in a bear market. You’ve had some volatility, but you’re not in a bear market.”
If you own an S&P 500 index fund, you're experiencing a mild sell-off or even a minor correction, depending on the sector you own. If you own the Nasdaq 100, it's in a technical correction, down 14% from recent all-time highs. If you own small caps, you're in a bear market, down more than 20% from recent highs. If you own shares of Meta or Facebook, as we call it, or the big cryptocurrencies, you're experiencing a market crash. If you own hyper growth and meme stocks, they're in a depression, down 80% or more from their all-time highs.
“So, this is one thing, if you stick to a more diversified… I’m a big indexer. I’m a big believer in indexation. You will not suffer the volatility. You will not get tenbagger gains in six months and 12 months. But take a look how many people, money managers beat the S&P 500 in 2021? We’re going to get an accounting, probably in the next few weeks, I would say that almost no one did. Not even the hedge funds. It was extraordinarily hard to beat that index last year. It’s the tortoise and hare situation. The indexers in the long run have outperformed 90% of the active money managers. My advice always is if you love to play the market, and you like that short term action, take 20%. Play what you think is right, but put that other 80% in a set of well-diversified investments. Could be a straight, capitalization-weighted index fund. I’d prefer weighting by dividends or earnings, which is a value tilted diversification. But that’s what I prefer as a long-term investment.”
Caleb:
“Let’s talk about investing for people at certain age groups. If you were in your 20s or 30s today, constructing your portfolio. What would you be putting in it? I have a feeling you’re going to be talking about index funds and ETFs.”
Jeremy:
"Yeah, index funds and ETFs. And ETFs are really index funds that are tradable. Started, Vanguard, the first one and then ETFs came on strong in the late 1990s, early 2000s, but they're really tradable index fund and that is the way to build the wealth in the long run. As I say, if you like to play, take 20%, even 30% of your portfolio, but you have to have the bulk that you're going to save for your future and retirement put away in a well-diversified… and you're perfectly right, Caleb. You mentioned, 'Do more than the U.S.' U.S. is 50% of the world's equity, the rest of Europe, Japan, and emerging markets, which are much cheaper than the U.S. at the present time. Yes, they don't have the technology in general. There's a few technology firms, certainly, and some of these countries, generally, they're selling add multiples 16, 17, 18 times earnings, which is very reasonable in a very low-interest rate world. And I do have a lot of international investments. I know it's been painful. I know they have not kept up with the U.S., but just like the shift that I believe will occur to value stocks in 2022, I think will also very likely produce an outperformance of international to U.S. stocks in 2022."
Chinese stock markets are back open for business following the Lunar New Year celebrations, and Sweden will become the latest country to lift COVID-19 restrictions. The biggest Nordic nation joins a list of European countries, including Italy, Switzerland, and France as well as neighbors Denmark, Finland, and Norway to relax rules under pressure from a pandemic weary public.
Caleb:
"How about if you're like me? Early 50s, you've been investing for the long term. I read your book when I was much younger. I'm heavily into growth indexes and ETFs. Do I need to add some value to my recipe?"
Jeremy:
“I would. I would, and I think the month of January showed it. You can now, especially… the value stocks have a greater dividend. If you don’t want to pay taxes on the dividends, this is where your IRAs and your your tax-sheltered… just reinvest those dividends. But it’s so easy now to have a reinvestment plan, either with ETFs or with standard mutual funds and watch those dividend reinvest. And all of a sudden, you start out with a 1,000 shares in a few years. You have 11 hundred and 12 hundred and that goes up exponentially. That is what accumulate over the long run. The pure growth stocks, and they’ve done extraordinarily well, don’t get rid of them at all. But have a much lower dividend yield. You’re relying on the capital gains completely in those cases. So diversification, I think, is important.”
Caleb:
“Dividend, earnings growth, compounding, that’s the magic fairy dust in the stock market that really builds wealth over the long term, as long as you’re consistent. And you’ve been preaching that for as long as I’ve been following you. I got to know this, Professor, what’s your take on cryptocurrencies? What’s your take on the Bitcoins of the world in terms of an asset class and in terms of a a way to invest?”
Jeremy:
“I’ve often called crypto the new gold, but there are pluses and minuses on the new gold. There’s more regulation now. There’s more competition to Bitcoin. Now there’s a movement to proof of stake rather than proof of work, which uses a lot less energy. I do not think that Bitcoin is going to be the currency of the future. It’s still too slow and too high bid-ask spreads and volatility to become that at this point. And part of it, by the way, happens to be our banking system, which could do a darn better job itself at facilitating fast and costless transfers. So I have to say that I am cautious. I’m impressed with blockchain and recording. I am less certain about it being used as a currency that can transact most everyday transactions.”
Caleb:
"I can't wait to read about it in your new edition of your book, which I'm going to preorder because I cannot wait to get that and to give it out as a present to other people. Professor Siegel, you've influenced so many people and investors in your career. I'm wondering who was your biggest influence coming up or who is influencing you now?"
Jeremy:
"It's a good question. I mean, I got my degree in economics… Paul Samuelson at MIT when I got my Ph.D. and then a college professor, Milton Friedman. The importance of free markets, I would say and Paul some themselves began writing a lot in finance and then later on, I mean, one would have to say that when Jack Bogle invented the index fund, the S&P 500, that was a game changer. And I've often said… people say, 'What motivated you write the first edition of Stocks for the Long Run?' And I said, 'I wanted to write the book you would read after Burton Malkiel's A Random Walk Down Wall Street, which I believe is going into its 16th or 17th edition. Burton has is called me up. What a remarkable guy in his 80s and still writing editions. Wonderful, wonderful person. But I wanted to write a book that would complement his. So, Jack Bogle, Burton Malkiel, and Milton Friedman and Paul Samuelson as my as my teachers have influenced me greatly."
Caleb:
"That's kind of like a hall of fame in and of itself, the Mount Rushmore of economists and market thinkers. And that's a really good foundation for you. And you have influenced, again, so many people in your career. So, we're definitely talking about you in that same sentence. Professor Siegel, you know that Investopedia is a site built on its investing terms and its definitions. People come to us to kind of learn those terms as they as they grow as investors. What's your favorite investing term?"
Jeremy:
"Oh, that's a good… But let me say that I appreciate… I often, when I need a quick definition of something, I search on Google and I love it when Investopedia comes up. And in fact, when you ask me… and I get many, so many requests. But when you came up on Investopedia, said, 'Listen, that has done good things for me. Concise definitions. Good history.' Listen, if I can do something back for you, I am happy to do so. So, lots of almost any term. You're a go to place. Let me let me tell you. "
Caleb:
"Thank you. Is there any one term that really speaks to your heart, that just makes your heart sing, when you think about investing that you love teaching to your students or thinking about?"
Jeremy:
“I guess one would have to say indexing. I mean, because I think that’s the key to diversification. Low-cost indexing as being the key to diversification. I know it’s not fancy, but I think it’s stood the test of time. 

Caleb:
"Yeah, I think you're absolutely right. And folks, you can't see me, but I am melting here with those compliments from Professor Siegel. Professor Jeremy Siegel, the Russell E. Palmer professor of finance at the Wharton School at the University of Pennsylvania. Best-selling author. I'm so excited for your new edition of your great book, Stocks for the Long Run. And I am so honored that you joined us on the Investopedia Express. Thank you for taking the time."
Jeremy:
"Thank you, Caleb. Hope to talk to you again."
It’s terminology time. Time for us to get smart with the investing term we need to know this week. This week’s term comes to us from Jim in Daphne, Alabama, right there on Mobile Bay. Jim suggests bifurcation this week, and we like that term, given a lot of the splitting we’ve seen lately. What is bifurcation? Well, according to Investopedia, bifurcation is the splitting of a larger whole or main body into two or smaller separate units. Bifurcation can occur when a company divides into separate divisions, thereby creating two new companies that can each sell or issue shares to stockholders. Companies may seek bifurcation for certain tax advantages or to focus more resources on the part of the business that’s showing more growth.
This past quarter was the first time Meta Platforms broke out results for its social media platforms Facebook, Instagram, and WhatsApp and its Reality Lab segment, which includes the Oculus Virtual Reality Business, gaming, and the Metaverse. While both segments are still under Meta Platforms and feed into its overall results, we might very well see Meta spin off Reality Labs and do a separately traded public company. We could see that with Amazon.com and Amazon Web Services and a whole host of other companies. Good suggestion, Jim. We’re sending you down some sweet looking Investopedia socks for your next trip down to Boudreauxs Cajun Grill in Daphne off Route 78.
U.S. Bureau of Labor Statistics. "Employment Situation Summary."
U.S. Bureau of Labor Statistics. "Job Openings and Labor Turnover Summary."
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