Wednesday, September 30, 2009

I guess I think markets are more efficient than does Robert Lucas

I was astonished to read the following in Brad Delong's blog today:

Thus the thing to focus on is that the prices of risky financial assets are very low—not as low as they were last March, when the S&P 500 kissed a level of 667, but still very low. Why are they so low? The answer is that the risk tolerance of the private market has collapsed. For example, consider what the University of Chicago’s Nobel Prize-winning economist Bob Lucas told Tom Keene of Bloomberg last March 30—that he was 100% in cash:

LUCAS: [T]here is no question that fear is what this liquidity crisis is. I mean the reason I got into money [with my portfolio] is that I got afraid to leave my pension fund in other securities. So I’m sitting there with a portfolio full of zero-yield stuff just because I’m afraid to do anything else. I think there are millions of people like me.

KEENE: What will be the signal for Robert Lucas to go back into the markets...?

LUCAS: I don’t know. Robert Rubin made a joke about that in the first session today. Nobody knows...


My personal investment strategy for retirement has been (and continues to be) to diversify across a set of passive index funds: some equities, some fixed income, some in the US, some abroad. I do not think I can forecast interest rates, nor can I pick stocks (although I try to pick REITS, mostly for fun, because I do, after all, teach real estate). I know that over my investment horizon (I expect to retire in something like 20 years), stocks and bonds will perform better than cash. I did not change my allocations last year, because, well, once the value of stocks fell, buying new ones seemed cheap. I never take short positions, because when it comes to investment, I am a coward, just not so much of one that I would ever think to put everything in cash (or even worse, gold).

The irony, of course, is that my investment strategy reflects a greater belief in efficient markets than Lucas'. To be fair, though, he is older than I, and so has more about which to be afraid.

7 comments:

gary curran said...

of course a wide spectrum of investments worldwide is the safest investment

Uncle Billy, Cunctating Globalist said...

Do you follow foreign real estate markets at all? *If* you were to offer your thoughts on the most attractive ones for investment purposes currently, would you have any to offer?

Or is just as big a mess everywhere else?

I have a friend who raves about multifamily property in Romania for instance. Another about deals in Costa Rica on sfr's.

Short of that -- do you know of any countries that don't require paying property tax?

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Jay Banks said...

Lately it seems that investing in real estate is the way to go. It seems that Canadians are aware of this fact. According to The Angus Reid Omnibus Survey (conducted on September 15), 77% of respondents in Canada preferred investing in real estate instead of stocks. And I can't but agree with this. Real estate market is a bit more predictable then the stock market, there it's just a matter of luck from my point of view. You should check out my article about Brick and Mortar Investments. It really shows how investing in real estate can pay off.

Take care, Jay

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