The first decade of the 21st century has been painful for investors accustomed to hearing that stocks are the best place for long-term growth and the only asset class that protects wealth against inflation.
Baby boomers - the generation that saw pension funds replaced by 401(k) and other defined-contribution plans - were accustomed to hearing that over the long haul, U.S. large-cap stocks earn an average of about 10% a year (Source: New York University, 2010). As recently as 2006, investors were told that there was not a single rolling 10-year period going back to 1987 with a negative return.
The S&P 500's 75% climb off its lows of March 2009 notwithstanding, the 2000s have seen poor stock returns. For the 10 years ending in 2009, the Standard & Poor's 500 index lost an average of just under 1% per year (Source: New York University, 2010). Now, with retirement nest eggs still reeling from losses suffering in the bursting of two stock market bubbles and the collapse of real estate prices, investors are wondering: Do we dare trust our future to stocks any more?
The answer depends on whom you listen to. On one hand, Yale economist Robert Shiller said in The Wall Street Journal in 2010 that he expects annual stock market returns to be barely positive over the next 10 years. On the other hand, Wharton economist and long-term market bull Jeremy Siegel thinks the stage has been set for a return to robust gains of 10% to 12% a year.
And then there are people like fund manager Bill Gross of PIMCO who sees the stock market returning a mere 4% to 5% over the next few years; and John Hussman, economist and president of Hussman Investment Trust, who believes returns will be only slightly better at about 5% to 6% per year over the next five years.
If you feel like the uncertainties of the stock market are too much to bear, then ask yourself this: What are you alternatives? Money market and short-term CD yields are at or below 1% and adjusted for even the current low rate of inflation, offering negative real returns. Treasuries and gold are at all time highs and, many observers say, are vulnerable to the same kind of bubble burst we've just seen in stocks and real estate. Compared to these, even mediocre stock returns look competitive, if not attractive, and offer long-term upside potential if you believe that the global economy isn't set on a permanent stall or decline.
Most financial advisors still argue that stocks belong in even the most risk-averse investor's portfolio. What's at issue, then, is a matter of the strategic percentage, and then it's a matter of annually rebalancing your allocations to stocks, bonds, cash, real estate, and commodities at least once a year.
Why? Because, despite the great recession of this century and the great depression of the last, the business and economic cycle has yet to pass into extinction. Asset returns still fluctuate, and the fluctuations for each asset class occur at different times and with different intensities. By rebalancing, you force yourself to practice the kind of discipline the most sophisticated investors follow: you take your profits on the assets that have grown the fastest and use them to buy more of the assets that are on sale. The end result: you can reduce the volatility of your portfolio and could increase your long-term returns.
This of it this way: Who is better off? The investor who bailed out on stocks when the market hit bottom in March 2009, or the one who loaded up on stocks just when things looked their worst? For help determining the optimal stock balance for your portfolio, please call.