The price of oil has plummeted. China’s economic growth is slowing. Bonds offered by Japanese and European banks are paying negative interest rates. Stock prices around the globe are down sharply from one year ago. On top of that, watching the presidential debates has me more depressed than ever.
If you are tempted to sell your stocks and wait until the election is over, with the hope that things will get better when campaign season comes to an end, it is time to reconsider. I am as bullish on common stocks as I have been during my 33 years in the trenches, and here’s why.
I am bullish on stocks because I am bullish on people. This is not a Pollyanna-ish, head-in-the-sand view of portfolio management. It is based on hard numbers. It is an acceptance that over the long haul the appreciation in common stocks has closely tracked the collective growth of underlying companies that make up the stock market.
Show me an asset class, including real estate, that has consistently outperformed common stocks over a period of 10 years or more and is readily accessible to my investing dollars, and I will gladly include it in my asset allocation. Otherwise, my money’s on common stocks.
It is hard to be bullish on people when you are glued to the daily news cycle and its negative reporting. Now, I get it — bad news sells. But the irony of the news reporting, at least locally, is that somewhere in that 30-minute telecast is a traffic report showing the maddening rush-hour commute.
Sitting in traffic is not fun, but that traffic serves as a reminder that every day, billions of people around the globe are going to work to earn a living and provide for their families. They are committed to not only doing a good job, but coming up with creative ideas to make their companies faster, leaner, and ultimately more productive.
This is the cycle of business and the foundation of companies, and it is integral to the energy of life. It is what makes economies and countries thrive and prosper. I want to invest my hard-earned portfolio dollars into that energy.
Another reason I am bullish on common stocks is because, frankly, the alternative of investing in bonds is pretty dismal. Rates on short- and long-term Treasury bonds, municipal bonds, CDs, and corporate bonds are hovering near all-time lows. For financial planning purposes, even though I have lowered the annualized returns I expect to capture on common stocks from 10 percent to 7 percent (based on current valuations and slower worldwide economic growth), it sure beats the 2 percent expected returns I have pegged for the bonds in my portfolio.
Heck, the dividend yield itself on the S&P 500 Index of blue chip stocks is generating a higher return than the 10-year Treasury bond.
In the good ol’ days, or at least when I graduated from college some 33 years ago, one could have invested in CDs paying 12 percent and tax-free bonds at 8 percent. Back then, while I was working at a major Wall Street firm, the clients I worked with were content allocating their entire portfolio to bonds. Today, it is an entirely different story. A significant allocation to common stocks is necessary to generate any type of meaningful long-term returns. This forces investors to ignore the short-term stock market swings during the pursuit of their financial goals.
This article originally was published in the April 2016 issue of 425 Business.