Equity Risk Premium – Where Have You Gone?

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BusinessWeek has declared that the sacred texts of investing need to be rewritten. The so-called equity risk premium, the once-sacrosanct belief that stocks perform better than bonds over time, has been vastly overrated.

According to the article “Searching for True North” (September 24. 2009) the Leuthold Group, a Minneapolis research firm looked into market performance earlier this year and reported that U.S. Treasury bonds had outperformed U.S. stocks over the preceding 10- and 20-year periods. Bonds also beat stocks over the past 30 years. Even the 40-year returns were basically equal, a feat never before witnessed in the U.S. markets. Over other periods, of course, stocks performed far better. But for four decades they were a sucker's bet.

So how do you look at the market going forward? BusinessWeek says that two opposing theories are emerging. One group of prognosticators claims the markets are in the throes of a "new normal," a long period of slow growth during which old investing rules will give way to new ones. The other group says the epic abnormality of the past few years will soon be swept away by a massive reversion to historical patterns. Depending on whom you believe, today's stock market is either a trap door or a coiled spring.


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