- Cathy Pareto's articles on Seeking Alpha
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It’s not unusual to hear prognostications of doom and gloom when the markets are in disarray, as they have been for several months now. A front page article in the Wall Street Journal this past week would indicate that stocks might be in store for a ten year lull, in other words, dead flat performance. If you read the headline alone (“Stocks Tarnished by Lost Decade: U.S. Shares in Longest Funk Since 1970s"), you might just consider running for the exits in a fit of panic.
But, should investors worry and should they consider abandoning equities for safer bets? Not quite, here’s why.
Let us preface this discussion by recognizing that this is not the first, nor the last time we might be tempted to action by such dramatic interpretations within the financial media. In fact, we saw such similar predictions several decades ago when BusinessWeek published it’s infamous cover on “The Death of Equities”. The article, published in 1979, was written during a period when the markets were see-sawing from year to year following a peak six years before in January of 1973. Inflation was nagging economists and U.S. fiscal policy was merely an afterthought.
Sound familiar?
The article fleshed out bearish perceptions and suggested "the old rules no longer apply" and the "the death of equities is a near-permanent condition." Had you bought into this theory and dumped all your stocks (let’s use the S&P 500 as a proxy for stocks) in 1979, you would have missed out on one of the greatest bull markets in our history. Here is the data to prove it:
The annualized return during this ten year period was a very handsome 16.32%. I don’t know about you, but I’ll take that any day of the week! We saw this prediction of doom again in July 1993, when Forbes published “Bearish on America” and implored readers to sell U.S. stocks and buy emerging markets. For the sake of argument, let’s look at the three year period following the month the article was published. You be the judge, did this make any sense?
The annualized return for the period was 15.63% for the S&P 500, and 10.54% for Emerging Market stocks. Bad advice if you ask me.
What this article, and many others like it, fail to point out is that the definition or reference to stocks cannot be, and should not be limited U.S. based, large cap securities (for which the S&P 500 serves as a proxy). Is the assumption that the S&P 500 is the only market we can consider for stock investments? Are there no other stocks in the world, or even here in the U.S. worth considering? In fact, there are thousands of stocks around the world and across various sectors that are excluded from that presumption, which puts a hole in the doom and gloom theory. We can cover portfolio construction in a future article.
But, to make a blanket statement like that, without regard to the other types of stocks that exist in the global markets is a disservice to readers. There is no substitute for broad, global diversification. Markets will naturally follow cycles, often experiencing periods of extended underperformance, followed by periods of bullish returns. That’s the nature of the beast. A globally diversified portfolio comprised of different asset characteristics and sectors remains the best long term approach for investors, and yes, that means holding on to stocks. Diversified investors with a broad representation of the different types of asset classes available in the market survived the storms of the last bear market (2000 to 2003) and will survive the current one too.
The Lost Decade-- For Whom?
Is the U.S. stock market going to end the decade flat? The S&P 500 just might, but the rest of the global markets have been quite profitable. If we look at the monthly returns from January 2000 to February 2008 and annualized the returns, here is what we’d find:
So, is it time to abandon stocks? Of course not. All of that doom and gloom becomes quite irrelevant if you have structured a properly constructed portfolio, designed to withstand the gale force winds of this market’s “perfect storm”.
Remember, dramatic headlines sell papers, much like the financial pornography we see on a regular basis across the financial networks on the tube. Sizzle grabs your attention and sells ads. Trying to predict the future is a loser's game and nobody owns a crystal ball. If they did, believe me, they would not be sharing it with the rest of the world. The best defense right now is patience and discipline.
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Who knows the future?
True inflation is fluctuating between 7-12%. How does this help create a bullish market?
Let me guess, Cathy. Your firm recommends primarily equities.
Let me guess #2. Misery loves company.
To Britishsteel: There is no more gold held by either the U.S. in Fort Knox or by European Central Banks. They both sold it all off under the urgings of Paul Volcker a number of years ago. (P.S. If you read recently that European Central banks were selling off gold bullion don't be fooled - in actual fact they were selling gold bullion they have BORROWED from private individuals, corporations and countries that have it stored in their vaults - with a promise to repay those holders at a later date.). In the long run , as long as the U.S. maintains its current economic and financial policies Gold will not decline significantly or to any other degree against the U.S. currency.
For Global Diverisification I highly recommend three well-managed 'global' American Funds:
* Capital Income Builder (CAIBX: for global equity-income),
* Capital World Growth & Income Fund (CWGIX: for global growth & income, an extremely well-managed portfolio of the world's most profitable, dividend-paying, dividend-growing equities) and
* New World Fund (NEWFX: for global equities benefiting from the growth in the 'developing world').
These three proven long-term funds are managed by Capital Research & Management (American Funds) for 'long-term global equity investors'.
huh? you are contradicting yourself. the rich always get richer when the sheeple who read the WSJ or BUSINESSWEEK panic and sell - the smart money is there to get the shares at a discount.
its pitiful, really.
i love articles like the ones in the WSJ and BUSINESSWEEK. they signal a turnaround in the market. when they yell "BUYBUYBUY" , its too late to the party and when they "SELLSELLSELL", you are probably leaving way to early.
no one can predict the stock market, folks.
want to succeed people? be nimble. learn how to short stocks. make money whether the stock market rises or falls, but let's all remember - the stock markets TEND TO RISE, and the OVERALL LONG TERM TREND is RISING. walk carefully, and don't listen to the chicken littles (who would have you digging a fallout shelter - geez!).
You are right, there is no shortage of opinions here...not all of which I agree with.
"Let me guess, Cathy. Your firm recommends primarily equities."....it's really never wise to presume.....no, you are wrong. My clients portfolios are fairly balanced between equities, fixed income and alternative assets. Good try though.
and frankie coop not a contradiction if sheeple buy here at hgher prices and then when there is no buyers left what happens? you drop and who waits for the drop? the ones who bought at bottom sold to bagholders at top and ready to buy again at bottom. I felt that was pretty sefl expanatory but since I confused you here is the cycle I thought I described above . smart money buys at panic bottoms sells at euphoric tops , waits for crash in cash and shorts market on way down and then buys at bottom and waits to redistribute at top again . Any questions?
...Also wanted to say that since the high oil prices are unprecedented, and no end in sight this doesn't seem like a normal cycle. Countries going from 3rd world to middle class is unprecedented. They all need oil, especially if they are all going to drive cars. The price of oil will affect everything.