Why is this Topic Important to Wealth Managers? Today we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.

As was briefly mentioned yesterday with regards to stock equity positions, one analyst recently compared the returns of the S&P 500 against hard assets such as gold and silver (discussed later in this series). His research strategy was to model an investment starting in 1981 where the client would invest $1,000 each year in either the S&P 500, silver or gold at the average price for that year. The returns from the stock portfolio would be reinvested each year in the model. Additionally, the model showed a $1,000 contribution was made each year. [1]

The analysis provided the conclusions that investing in “stocks had been much more profitable in the first 20 years.” For example in the year 2000 the equity index holdings illustrated in the model provided for a 879% greater asset worth as compared to the price of gold and a 774%  increase over the price of silver.

However, since 2004, “precious metals have begun to quickly make up ground and, helped by S&P 500′s 57% crash during the last recession, silver managed to slightly surpass stocks in 2010”.  Interestingly, on “April 28, 2011, when the price of silver was near its peak, silver was a clear winner with a value of $233,917 and a compounded annual return of 11.8% compared to S&P 500′s $173,400 and 10.3%, and gold’s $115,889 and 8.12%.” [2]

The race is tight however, the silver market in particular is known for its volatility which was is still an ever present consideration. The conclusions drawn by the study include, in part, that “the magnitude of compounded rates of return depends a lot on the window of time” that the investor selects.[3] This conclusion is similar to those presented by other investment strategy such as those presented by Sethi (see previous section).

As the S&P 500 strategy may very well reflect, some investment commentators are questioning old models that may no longer be the right path for many investors.

Moreover, as one commentator notes, the traditional approach of selling stocks as retirement age approaches may not necessarily provide the best wealth management solutions. The traditional approach is to “typically tell those near retirement to move to safer asset classes. But stocks are not risky so long as they are selling at reasonable prices, according to [some] research.” [4] The commentator notes what wealth managers should be advising clients to look to valuations and timing to dictate asset class allocations.  In addition, the commentator suggests that “young investors can afford the risk of stocks because they have time to recover from price crashes.” [5] However, it may also be contended that a loss in value of assets caused by price devaluations in the market have a significant negative affect on long-term earnings given time value of money calculations. In other words, “this loss is greater for young investors than it is for any others (because young investors have more time ahead of them in which the compounding returns).” [6]

Nevertheless, as Warren Buffett notes, his investment strategy has never changed, it has always consisted of the motto—investment in companies that are undervalued is a large consideration to successful financial growth.[7]

Finally, there may be tax advantages to using the equity index model over the purchase of precious metals. Generally dividends are subject to special tax treatment and thus provide additional benefit. For detailed tax treatment of dividends see TaxFacts: Dividends.

Tomorrow we continue our series with Corporate Debt and U.S. government investment.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] See Sergei Barna. The Best Long-Term Investment: Gold vs. Silver vs. S&P 500. Seeking Alpha. May 20, 2011. http://seekingalpha.com/article/271054-the-best-long-term-investment-gold-vs-silver-vs-s-p-500. Last Accessed 5/29/2011.

[2] Id.

[3] Id.

[4] Rob Bennett. “The Bull Market Caused the Economic Crisis.” http://knol.google.com/k/the-bull-market-caused-the-economic-crisis#. Version: 26, Last edited: Apr 22, 2010. Last Accessed 5/29/2011/

[5] Id.

[6] Id.

[7] See generally, “Understanding Financial Statements with Warren Buffett”. Advisorfyi.com. Posted December 1st, 2010. http://www.advisorfyi.com/2010/12/understanding-financial-statements-with-warren-buffett/. Last Accessed 5/30/2011.

Tags: Business, Capital IQ, Equities, Investing, Investment, S&P 500, Stocks and Bonds, Warren Buffett

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