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Are stocks still a good investment?

Posted by admin on June 15, 2009 in Investment Products

For many months, investors have debated whether stocks are still a good investment. After all, at the nadir of the credit crisis, an investor who invested in the S &P 500 10 years ago would have received negative return. For some, it appeared that the Siegel-esque belief that investing in stocks for the long run was dead.

Although the economy has slowed its decent since then, some believe that the better empirical data to predict future performance of stock is to look at stock market returns for mature economies (for some reason, Germany is used as an example) since the period of time analyzed by Siegel (1802-2006) coincided with America’s ascendancy as an economic super-power and now it is levelling off or declining into a multi-polar economic framework.

The debate has slipped into the main-stream media as Time Magazine asks “Are Stocks Still Good for the Long Run?” and considers whether one would be ahead investing in fixed income instruments.

How the question is answered takes a puritanical “either or approach.” When this topic has been broached, the basis of comparison is typically 100% equity vs. 100% bonds. While there are people who have this type of asset allocation (see Let’s Bond as an example from the bond side), most retail investors do not invest fully in either 100% equities or 100% fixed income. In fact, many who are either pure equity or fixed income investors are professionals, or DIYer who understand their niche well. It is improable that these investors would invest only in the S & P 500 or buy a 10/30 year treasury and wait for it to mature.

Thus, the examples used to measure performance comparisons tends to be in the extremes and not reflective of the reality of the daily investing lives of most investors.

More to the point, there are some practical things to remember about looking at any asset class:

1. One of the points of an ideal  asset allocation is to reduce risk. A proper mixture of stocks, fixed income, cash and real estate should ideally be hedges against the short and medium term risks of the other asset classes. An under-performing asset class in a portfolio with proper asset allocation should not destroy an investing strategy.
2. As the Time article indicated, long term means different things to different people. The debate about whether stocks are still good investments is contextual. For those with long investing horizons (20 years plus to retirement), an ideal portfolio should contain some element of risk.
3. To quote the Time article, regardless of asset class, “…The main message… to John and Mary investor is, Pay attention to the price you pay for an asset.” In other words, its the classic, buy low, sell high advice.
4. Finally, moving from one investing extreme to the other is, in normal times, a sure way to lose money. In uncertain times such as this, one is only adding to their own stress.