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DEBUNKING SOCIAL SECURITY SPIN

Wednesday, March 09, 2005

ONE STEP AT A TIME. Stocks not risky investment scheme Much of the opposition to reforming Social Security by adding private accounts is based on the proposition that investing in the stock market is too risky. It's fine for people to invest on their own, but the government safety net - Social Security -- should be made of sterner stuff. One of the problems with that argument is that the only thing the government can guarantee - based on the steady demographic shift in America - is that the cost of the safety net, as it is presently constructed, will be much higher for future generations. It is already six times more expensive, even after adjusting for inflation, than it was when it was invented. We have long since passed the day when Social Security was a bargain for workers and retirees. As big a problem with the argument is the premise that the stock market is too risky. Last weekend, I took the opportunity to ask my guest experts on Ralph & Company (11 a.m. Saturdays on WORD) to opine about the future of stock market investing in general. Dant Goepper and Bland Burkhardt are investment managers with a combined 54 years experience in financial services. I asked them whether there's any reason to believe that the stock market will be a better or worse place to invest over the next 50 years versus the last 50 years. Goepper, the senior of the two money managers, said, "If you just take if from World War II forward, the stock market has averaged about 12 percent - that's the S&P 500. At 12 percent, your money is doubling every six or seven years pretty regularly." Goepper said the average return for high quality bonds during the same period has been 5.9 percent and the return on cash (short-term treasury bills) has been 3.8 percent. "So," Goepper said, "stocks have about doubled the return of bonds and bonds doubled the return of cash. Is there any reason to think that won't continue? Not to me. I think it will continue - the spread between those asset classes will continue. What I do think will happen is that stocks will come down, so if stocks come down to 8 or 9 percent, I think bonds will come down to about 4 or 4 ½, which means cash could come down to 2 or 2 ½. I think the ratio though will remain the same?" Question: "Has there been any real, permanent sea change in the American economy that would cause that to happen - the stocks might come down to eight percent or lower?" Burkhardt: "I think that there may be. We're kind of speculating here, but there is a lot more information about companies these days, and these companies are a lot more transparent than they were decades ago, and I think they are priced higher because of that, which would indicate a lower future return. Now -- a lot lower? I don't really think so. I think on average, Dant is about right - they they're probably going to come in the high single digits on average." Goepper and Burkhardt concede that the stock market is the most volatile of the major asset classes that they track on a regular basis. We've all seen recent evidence of that. After a major bull run in the late 90s, the Dow Jones Industrial Average took one of it biggest hits in history, dropping from a high of nearly 12,000 in January of 2000 to just over 7,000 in October 2002. But that low figure - 7,000 - was still a hefty gain over a 10-year period. In October 1992, the Dow opened at 3,271, meaning that at the end of one of the worst periods in the history of the stock market, the Dow Jones Industrial Average had a 10-year performance of more than 100 percent - not bad for a "risky" investment scheme. Ralph Bristol NOTE: If the stock market crashes and the American economy tanks, then there won't be any more money for Social Security either. Think for a second willya!

posted by Jack Mercer @ 3/09/2005 08:36:00 AM

1 Comments:

At 3/09/2005 11:57:00 PM, Anonymous said…

I love these sanctimonious jerkoffs who claim that investing in the stock market is too risky.

The biggest risk is letting these government bureaucrats keep on keeping on. It's already headed for bankruptcy. Where's the risk?

Good post. As usual, Da Snip has it dead-on.