QUESTION: I saw this in The Economist.  Should I be worried about the Equity Risk Premium being now almost zero?

ANSWER: Yes.

The explanation of why the ERP is a worry is well explained in a couple of sentences.

ACTION PLAN:

  1. If you still don’t understand the concept of ERP,  you are just punting securities, derivatives, etc, rather than investing.  You should get a licensed investment manager.
  2. The most significant means to increasing your wealth is getting the asset allocation correct.  For most people, that means knowing when to put money into equities, bonds, et al and when to take it out.  The first thing you need to ask your investment manager (or yourself if you take the DIY route) is what is the expected 10-year US Treasury yield and the percentage of a portfolio that should be equities, bonds, realty or cash (the other asset classes are so speculative, they should be only for the very brave).
  3. Once you establish how much to allocate to each class, then it is a question of which security or property in each class to buy.  For the DIY folks, that will most likely be an index.  For professional investment managers, it will  be buying individual stocks, bonds, realty or leaving money in cash in a well constructed portfolio.  Also, it may mean not holding any equities (as even cheap stocks go down when the tide floods out).
  4. Contact TurnerStreet if you wish to buy our current asset allocation recommendation (we do cash and equity only allocations for our wholesale clients), and the list of the stocks TurnerStreet would buy for a typical wholesale client, or if you would like TurnerStreet to manage your equities and derivatives portfolio.
IMPORTANT: This Q&A is general product advice for wholesale or sophisticated investors, and NOT suitable for retail investors.  Retail investors should seek advice specific to their circumstances and not rely upon general product advice written for other types of investors.  Retail investors acting like wholesale/sophisticated investor are likely to experience inappropriate and/or excessive risk for their circumstances, and unacceptable losses.