Are stocks too risky or are they still the best foundation for a retirement investment plan?
Two top scholars wrestled with that question in a debate before hundreds of advisors last week. In doing so, they did seem to agree on one thing: don't expect any homeruns in the equity market for the time being.
Jeremy Siegel, professor of finance at the Wharton School and author of "Stocks for the Long Run," took the pro-equity stance in the debate at the national conference of the National Association of Personal Financial Advisors (NAPFA) in Toronto. Overall, he says stocks are a relatively safe investment choice going forward. But his outlook on returns was modest. Going forward, he says, investors should expect inflation-adjusted real returns of just 5% to 6% per year.
The basic reason, he says, is that valuations are high.
"We have to get our clients realistic about what real returns are going to be," he said.
His counterpart in the debate, Zvi Bodie, professor of finance at Boston University and author of "Worry Free Investing," espoused an even more conservative view.
Noting that other scholars are projecting even lower returns, to the point where some expect zero gains going forward, Bodie said, "Who am I to make a judgment as to which of these people are right?"
His argument: stocks are too risky to be used for retirement savings.
Bodie feels the correct way to go is TIPs, Series I savings bonds and indexed life annuities. If an investor does dare to invest in equities, he says, it should be through call options on the S&P 500.
"You want to lock in real inflation-protected income," he says.
Siegel agreed that life annuities should play an important part in retirement planning, but he was wary of the use of call options and TIPs, the latter of which were yielding just 1.3% a month ago.
"Their yields are pitifully low at present," he said.
But Bodie argued the risks of stocks are too high, and that advisors too often equate long investment horizons with reduced risk-an assumption that is mathematically incorrect.
"The real issue is the tradeoff between risk and reward," he said. "People who are risk averse should not be exposed to the risk of equities."