Stocks Remain a Good Choice If You Want LongTerm Gains

Post on: 23 Июль, 2015 No Comment

Stocks Remain a Good Choice If You Want LongTerm Gains

Jonathan Clements Staff Reporter of The Wall Street Journal

Updated July 28, 2002 12:01 a.m. ET

The world is losing its head. You need to keep your feet.

How can you make sense of this crazy market, where the Dow Jones Industrial Average gains and loses hundreds of points every day? I sure don’t understand it.

But I also refuse to let myself get rattled. Stocks remain an investor’s best bet for earning stellar long-run gains.

To stay the course, you need to keep today’s stock-market turmoil in perspective. With that in mind, I keep circling back to these three thoughts:

Enough Already

The Standard & Poor’s 500-stock index is on track to lose money for the third year in a row. Such losing streaks aren’t unprecedented. But they are pretty darn rare.

To find anything comparable, you have to go back six decades, according to data from Chicago investment-research firm Ibbotson Associates. The S&P 500 posted three consecutive annual losses in 1939 to 1941.

Of course, it is possible stocks will post a fourth consecutive annual loss. But it seems unlikely. The odds are, the worst of this bear market is over. If you have held stocks since the March 2000 market peak, it would be foolish to throw in the towel now.

Oddly enough, investors may be in danger of repeating the error they made in the late 1990s, according to John Nofsinger, a finance professor at Washington State University and the author of Investment Blunders of the Rich and Famous.

People have a tendency to extrapolate past trends into the future, Mr. Nofsinger says. In 1999, the long bull market made investors think that the stock market went in only one direction — up. Now, investors are making the same mistake, but in the opposite direction. They seem to be extrapolating the market’s losses into the future.

Cheaper Still

As I have noted in earlier columns, stocks are no bargain. Historically, shares have traded at an average of 15 times corporate earnings for the prior 12 months. But right now, according to Thomson Financial/First Call, the S&P 500 is at 18 times trailing 12-month operating earnings and 15 times forecasted earnings.

Still, even though stocks are pricey, they look dirt cheap compared to bonds. To make the comparison, take the 4.4% yield on the benchmark 10-year Treasury note and divide that 4.4 into 100. This tells you that bonds are trading at 23 times the interest they will pay over the next 12 months, compared with stocks at 15 times forecasted earnings. That’s a huge gap. Historically, stocks and bonds have traded at similar multiples.

Those multiples won’t necessarily be brought back into line by an explosive stock-market rally. Maybe instead, interest rates will rise sharply, which would be bad news for bondholders. Maybe analysts will turn out to be too optimistic in their earnings forecasts, and thus stocks aren’t as cheap as they seem.

Indeed, much of the recent stock-market decline has been driven by doubts about the profitability of U.S. corporations. People don’t trust the earnings, that’s the problem, says Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School. There’s a real question about how much cash is getting generated by these companies.

But even if you trim estimated earnings to reflect these fears, stocks still look attractive, Prof. Siegel says. I think it’s a time to buy, he argues. Valuations are very reasonable from a long-term standpoint.

What Goes Down

Others see share prices plummet and worry about their shrunken portfolios. But when I watch stocks tumble, I also think about the silver lining. With every drop in the Dow Jones Industrial Average, the outlook for returns gets brighter.

Back when the Dow was over 10000, people were saying stocks might return 7% a year, says Minneapolis financial planner Ross Levin. Now that the Dow is so much lower, those return expectations have to increase.

The S&P 500 may have plunged well over 40% from its March 2000 peak. But the ability of companies to generate profits and pay dividends hasn’t diminished nearly as much. In fact, economic growth has remained surprisingly robust. That means every $1 invested in stocks today will buy a far bigger claim on dividends and earnings than $1 invested two years ago.

I still doubt that stocks will rival the long-run annual average of 10.7%, as calculated by Ibbotson. But for anybody with money to invest, this seems like a good time to be purchasing stocks, preferably through well-diversified, low-cost stock funds.

My advice: If you haven’t done so already, sit down and decide what percentage of your portfolio you want to allocate to stocks and what percentage to bonds and other conservative investments. What if stocks tumble even further? Be prepared to step up to the plate and buy more, so that you keep your stock holdings at your target percentage.

Sure, that takes a lot of guts and a lot of discipline. But you need that sort of fortitude if you want to earn healthy long-run returns.

Many investors — pros and little guys alike — did not study and plan, and they’re flunking, says William Bernstein, an investment adviser in North Bend, Ore. Only a minority, I think, were ready [for the market decline] and are turning in adequate performance. The careers of most investors are defined by how well prepared they are for a moment like this.

To contact Jonathan Clements, send an e-mail to sunday@wsj.com


Categories
Cash  
Tags
Here your chance to leave a comment!