If you’ve been looking at your portfolio with a less-than-jaundiced eye lately, check out this interview with renowned economist Jeremy J. Siegel, a finance professor at the University of Pennsylvania’s Wharton School of Business and author of the classic Stocks for the Long Run. In “Why Stocks Are — and Will Remain — the Best Bet,” published by Knowledge@Wharton, Siegel says he doesn’t hold any bonds in his own portfolio.
“As for an investment purpose, outside of a little chunk that rolls over in junk bonds, no extra bonds,” he says. “I’m very enthusiastic about stocks. I’m not enthusiastic about gold because I think gold is priced for either hyperinflation or the end of the world. Neither of those two eventualities, in my opinion, is going to happen. I think commodities are expensive. Oil is expensive.
“So really, stocks, properties — now, you know, there are some good values in real estate. REITs are very high, but they still should be part of your portfolio. In some investment properties, if people want to go into the liquid sides, it’s fine. And of course if anyone is waiting to buy that home and lock in that mortgage rate, now is the time, and definitely that would be an advisable purchase to make. But as far as the liquid part of your portfolio, the vast majority should be in stocks now.”
Bargain-hunting investors should be able to find some opportunities, even now.
“Stocks are earning 6%, 7%, 8% off their capital base,” Siegel says. “And that’s a great earnings rate in a zero-interest-rate world. In fact, I find that the average price-earnings ratio of stocks when you’re in a low to moderate interest rate environment, or still in an extremely low interest rate environment, is 19. So you know, being a P/E ratio of 14 or 15, depending on how you measure, is still well below the average valuation in a low to moderate interest rate environment.”
Don’t overlook emerging markets, he adds: “I’ve been a big fan of the emerging markets. Right now, the P/E ratios of most emerging markets are 10 to 15. You have a few in the high teens, but that’s a very reasonable price historically to pay for the type of growth that they have engineered over the last five and 10 years. Honestly, I still think they’re going to be the engine of growth over the next decade.”
Siegel was speaking in late February, before the Dow began to break records: “I stuck my neck out early last year and was on record saying that I thought by the end of 2013, the Dow would reach and exceed 15,000. And a chance of 17,000.”
Since he spoke, the Dow Jones Industrial Average hit 14,286.37 on March 5 and 14,447.29 on March 11.
So what’s Siegel see for the next five years? He tells Knowledge@Wharton that stocks are “not overpriced, and I think we’re going to get an economy that’s going to go from subnormal growth of 1% to 2% to good growth of 3% to 4% by the end of this year and into 2014.”
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