Taking the reward out of risk.

• Author: Gearino, G.D.
• Position: FINEPRINT - Viewpoint essay

Lately, I've been reading much about the "equity premium"--that extra bump in return you enjoy from investing in the stock market, where there is risk, rather than investing in government bonds and such, where there's almost none. That premium, of course, is the reward in the risk-and-reward formula that serves as one of the foundational blocks of capitalism. The greater the risk, the bigger the payday if the cards fall your way. Everybody understands this. God knows, a whole retail investment industry has been built on the notion that stocks ultimately outperform almost all other investments.

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But what if there's no equity premium nowadays, or at least not much of one? One study I reviewed showed that the extra value stocks bring to your portfolio has faded decade by decade. Somebody else flatly declared that the equity premium didn't exist anymore--and hasn't for three decades. (More about both claims in a moment.) That last assertion was especially troubling, because the past 30 years pretty much represent the span of my investing career, which--small-bore as it may be--was launched in the belief that stocks would leave me better off in the long run. Now I find out that among the pointy-head crowd of academics, theorists and math wizards, there's a long-running debate over whether investors actually get much reward for their risk. It's a disturbing thing to have one of life's fundamental certainties questioned. What else am I going to find out? That I didn't actually win that Pulitzer Prize I assumed had been lost in the mail all these years?

Back to the two findings mentioned above: The first is a 2000 study published in the Federal Reserve Bank of Minneapolis Quarterly Review (yeah, there's some light reading), which shows that the equity premium declined every decade between 1950 and 1990 before making a modest rebound in the 1990s. Not that the rebound helped much, though. According to the study's conclusion, "The premium averaged about 7 percentage points during 1926-70 and only about 0.7 of a percentage point after that." The subsequent decade, of course, has proven to be a flat-liner for stocks, a point driven home by the second report I found--a 2009 analysis from Bloomberg News that showed that, for the first time since 1979, a 30-year Treasury bond had a better return than did the widely watched MCST World stock index. Or as one fund manager told Bloomberg, "Over the last 30 years there's been no risk...