In my 25 years in the financial markets, I can’t recall getting the same question from so many investors:
“Should I get out of stocks?”
No doubt, it’s a fair question – and it’s one on the minds of millions of investors these days, as the economy struggles to climb out of recession. Viewed through that prism, let’s give the question a review and a fair answer.
First, a caveat. Stocks are to investment performance like Michael Jordan was to basketball. In fact, history indicates that avoiding stocks is a real drag on portfolio performance. According to the St. Louis Federal Reserve, $100 invested in stock, Treasury Bonds, and Treasury Bills from 1928 through 2007 has grown like so:
Stocks = $178,114
Treasury Bills = $1,934
Treasury Bonds = $5,007
Based on $100 invested in each category from 1928 through 2007
That said, there’s little doubt that stocks experience greater volatility and represent greater risk than fixed-income investments. After all, stocks, on average, fell by over 36% in 2008 alone.
That’s a big reason why, by and large, any money you have set aside for short-term purposes – think three years or less – should be held out, or at least greatly reduced, from the stock portion of your investment portfolio.
But these issues are viewed through a short-term lens – and the bedrock investment platform that WrapManager believes in to is built on a diversified, long-term approach that emphasizes the proper allocation of assets. Throughout the decades, we believe that strategy has provided the best formula for sustained investment success – and stocks are the centerpiece.
Viewing the case for stocks through recent events, the case for a long-term run-up in stocks grows even stronger.
Consider these themes – which all point to an upward path for stocks:
The economy is healing – It certainly took a while, but the U.S. economy seems to be emerging from what financial pundits call the “Great Recession.” After two years of steady deterioration, the U.S. economy is expected to emerge from that recession and resume positive growth (as measured by the Gross Domestic Product) by year-end, says the Federal Reserve. Already, key foreign economies like France, Germany and Japan have already emerged from recession. The U.S. is expected to follow suit.
The stock market has likely bottomed – While we expect stocks to remain volatile, evidence suggests that the stock market has emerged from a 10-month, bottom-searching funk, with a sustained long-term upward trend to follow. Layoffs seem to be leveling off, businesses are starting to spend again to keep competitive, and corporate earnings are beginning to trend upward. These are the ingredients that normally fuel long market rallies.
Cash Off the Sidelines – Like a bear emerging from hibernation, investors are itching to move some of all that cash that’s been resting on the sideline. Certainly current cash reserves are highly elevated – at about $5 trillion by some estimates. And the low returns on bank-deposit investments – bank CDs are yielding historically low rates, for example – are beginning to wear down, if not irritate, investors. By comparison, future positive returns on stocks look pretty good.
The “Kitchen Sink” Effect – Rarely in the annals of contemporary finance have so many powerful entities – think the Federal Reserve, Congress, the U.S. Treasury, and the White House – combined to fight an economic downturn.
Among the actions taken by the Fed and other central banks:
- The Fed lowered interest rates to close to zero. Other central banks lowered rates as well.
- Congress approved the $700 billion Troubled Asset Relief Program to provide emergency financing to large banks. Other governments did the same with their banks.
- Under the direction of the Group of Seven, government insurance for banks was expanded worldwide. Governments pledged to prevent the failure of systemically important banks, and they promised to provide adequate capital to the system.
- The Fed created new facilities to “lend freely against sound collateral.“
- The Fed and other central banks began buying long-term debt issued by public and private institutions to inject liquidity to vital credit markets.
- The Fed and the Treasury Department conducted a public “stress test” of large banks to determine their capital needs, which in turn was followed by significant increases in capital raised in private markets.
With so many muscle-bound entities looking to help cover investor’s backs, it makes good sense to position your investment portfolio for what we believe will be a renewed period of growth.
Then there’s the bigger picture. The key in making any decisions regarding exposure to the stock market – like most decisions in life – is simple, straightforward common sense. That is, set goals for your own personal financial needs and choose investment strategies with those goals in mind.
We believe the best of those strategies include taking a long-term perspective and maintaining a diversified investment strategy. Wise investors also avoid jumping in and out of markets, in an exhausting effort to keep ahead of corrections. Chasing markets simply distracts you from achieving your long-term financial goals.
The combination of these short – and long-term themes indicates a good platform for stocks to regain solid footing. As always, tread carefully – but do so with a mindset that exposure to stocks could be in your best interest.
The attached report and information have been prepared or produced by WrapManager, Inc. from sources and data believed to be reliable. Information provided in this report is for educational and illustrative purposes only and should not be construed as individualized investment advice, as an offer to sell, or the solicitation of an offer to buy any security in any states where such an offer or solicitation would be prohibited by regulations. WrapManager, Inc. is not a tax advisory firm. We recommend you contact your tax attorney or CPA prior to utilizing any of the tax-related strategies mentioned or discussed. Returns and experiences will vary for each client. Each client’s risk tolerance and investment objectives are unique to them. Past performance may not be indicative of future results. No assumption that future performance of any specific investment or product made reference to directly by WrapManager, Inc., on its Web site and in marketing materials, will be profitable or equal the corresponding indicated performance level(s). If performance numbers are generated gross of fees, a client’s return will be reduced by investment advisory fees and any other expenses. Opinions expressed are those of WrapManager, Inc. and are subject to change without notice and are not necessarily those of Prospera Financial Services, Inc., its directors, parent company or its affiliates. Securities offered through Prospera Financial Services and cleared through First Clearing, LLC. Prospera Financial Services - Member FINRA/SIPC.