Siegel: 'New Normal' Investing Opportunities

December 29, 2015

Jeremy Siegel, Ph.D., is the Russell E. Palmer Professor of Finance at The Wharton School and WisdomTree’s senior investment strategy advisor. Heather Bell recently chatted with him about what he’ll be addressing in his presentation on the outlook for the market at Inside ETFs, the largest ETF conference in the world, Jan. 24-27. What are you planning on talking about at the conference?

Jeremy Siegel: I plan to talk about the future path of interest rates, as well as the valuation of equities in the U.S. and around the world and what we can expect as the “new normal.” I also plan to discuss the lack of productivity growth in the world economy and what causes that.

I’m also going to talk about the emerging markets, which have been beaten down dramatically. I think we could see very good returns in three to five years in these markets, but the commodity collapse certainly has been far greater than anyone had anticipated.

One should note that commodities themselves do not have good returns in the long run, so those people who are shocked by the commodities cycle perhaps wouldn’t be if they had looked at long-run data. The long-run return on gold is only about a half a percent per year above inflation, well below stocks and even bonds. I’m going to speak on this issue, and of course Federal Reserve policy in 2016. Did the commodities boom sort of mislead people?

Siegel: Yes, I think it did. People extrapolate too much from the short run. They look at the last two, three or four years and think, “That’s the way it has to go.” They fail to take a broader look at history, which is much more important than short-run trends.

It’s a human reaction that we get too wrapped up in in the short run. But we have been endowed with a rationality that allows us to step back and look at a longer-term perspective, and when you do that, you are more confident about what the long-term trends are. I guess it’s that short-term human reaction that makes a good argument for index-based investing, to a certain degree.

Siegel: Yes, or smart index investing—anything that is disciplined and based on sound values. It doesn’t mean shifting in and out of stocks when things “look” good or bad. I think 90% of those traders end up losers.

Obviously at the bottom of the bear market, everyone is the most pessimistic, and at the top of the bull market, everyone is the most optimistic, so if you’re going to follow optimism and pessimism, you’re not going to be a successful investor. What kind of international exposure should the average investor be aiming for?

Siegel: Half the world’s equity is outside the U.S., and it’s not unreasonable therefore to have approximately half of your equity portfolio in international investments.

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