Oct 27, 2022
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