By Philip van Doorn, MarketWatch
Our solution to the problem of millennial investors mistrusting investment advisers prompted a huge response from readers. But it also led to an even more important question: What about millennials, those aged 18 to 35, who hold no stocks?
Those younger people ought to listen to John Buckingham, editor of the Prudent Speculator newsletter, which has a No. 1 ranking for performance since inception 40 years ago from the Hulbert Financial Digest. Mark Hulbert wrote in a Barron’s article in February that the newsletter’s “advice has made more money over the past 40 years than any of the nearly 200 other services” he monitors.
Buckingham, who’s been in investment management for 30 years, shared with us a set of numbers that clearly shows how important it is to invest in stocks and remain committed for decades. The result: almost guaranteed wealth.
“If you are 50 or younger, or have 10 years before taking money out, and do not have 100% in equities, you are crazy.”
John Buckingham, editor of the Prudent Speculator
Only one in three millennials was investing in the stock market, according to the results of a study released by BankRate.
A reason many millennials may be steering clear of stocks is that “the two big declines in the 2000s colored the opinions of a whole generation of investors,” Buckingham said in an interview in New York on April 27. “If you actually look at the raw numbers [going back to 1927], you will see that continuing to buy over time, independent of what the market is doing, will be rewarding.”
Buckingham doesn’t try to time the market; he sticks with his stock-selection strategy. In addition to his newsletter, Buckingham and his team manage money following the Prudent Speculator strategy through AFAM Capital .
Here’s Buckingham’s set of numbers. It’s a list of average annual returns by asset class from June 30, 1927, through Dec. 31, 2016, along with the average inflation rate:
|Asset class||Average annualized return||Standard deviation|
|Large-company stocks (S&P 500)||9.9%||18.9%|
|Small-company stocks (bottom 20% of New York Stock Exchange)||12.1%||28.6%|
|Long-term corporate bonds||6.0%||7.6%|
|Long-term government bonds||5.5%||8.5%|
|Intermediate government bonds||5.1%||4.4%|
|Sources: Al Frank Investment Management, using data from professors Eugene Fama and Kenneth French, and Ibbotson Associates|
Buckingham said he defines value stocks by using price-to-book-value ratios for companies. The less expensive half of all stocks, by this measure, he calls value stocks.
Look at the table — the numbers are astounding. Over the long haul, there’s no question that the four categories of stocks have greatly outperformed all other classes of securities. The standard-deviation column shows the stocks have more price volatility than the other classes. So this is the big stumbling block that keeps some people out of the market.
The Prudent Speculator
Millennials, and anyone else for that matter, must not only tolerate price volatility, but expect it. The rewards for doing so are enormous.
The Prudent Speculator follows a value-based approach and has a strong track record to back it up. Another option is to use low-cost index funds that track broad indices, such as the benchmark S&P 500 /zigman2/quotes/210599714/realtime SPX +1.34% , and also growth or value indices. Here are a few examples: