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Should we still invest in stocks for the long term?

October 17, 2011

The market the last decade may be hazardous to your health if you watch it on a daily basis

Sir Winston Churchill once said, “For myself I am an optimist — it does not seem to be much use being anything else.”

If you have watched the market and the national news the past couple of months, it is pretty easy to be confused. Personally, I have spent time wondering if the conventional wisdom of investing is still true. This being said, I am still an optimist.

In the past three months, S & P has downgraded U.S. debt from AAA to AA+, which means it is a little more risky to buy U.S. debt in treasuries. When this happened, what did people and institutions from around the world do? They bought U.S. treasuries, pushing the yield down below 2 percent. Why did they buy treasuries even when they were downgraded? If institutions and people want a safe place to put money, they still invest in US. debt.

When you look at the market one day, the Dow Jones average is down 600 points, and the next day it is up 400 points. The swings in the market that used to take months now happen on a daily and even hourly basis.

So what is an individual to do? I still am sticking with conventional wisdom. For my long-term investments, I’m investing in a mutual fund with low fees that has a wide variety of stocks that copy the market as a whole. I am not watching my investments on a daily basis. I am planning to let it ride and continue to add on a monthly basis over the next 30 years.

Why? There are a couple of reasons. First, I have learned from history. Here are some of the annual returns of the S&P 500 for a select series of years: -9.46 percent, -22.72 percent, -44.20 percent, -5.81 percent, 56.79 percent, -8.01 percent, 54.93 percent, 32.55 percent, -32.11 percent. You may think these are the returns for the past nine years, but actually they are the returns from 1929 to 1937.

For the past 9 years in the U.S., the returns have been -22.27 percent, 28.72 percent, 10.82 percent, 4.79 percent, 15.74 percent, 5.46 percent, -37.22 percent, 27.11 percent, and 14.32 percent.  It took the country awhile to get past the Great Depression, but after 1941 the stock market has averaged nearly 13 percent a year through the end 2010 including the Dot Com bust of 2000 and the near financial collapse of 2008.

Even though we live in challenging times, there is evidence in the present that can justify this position. Laurence Fink, CEO of BlackRock, the largest money manager in the world, says he currently likes stocks over bonds. He points out many stocks have strong fundamentals for their current stock prices and are offering dividends higher than many current bond rates.

Large corporations also have a lot of cash right now. Excluding the financial companies, S & P 500 companies currently have $1.15 trillion in cash. These companies are going to hold the cash until they find the right investment, but when the economy looks poised for growth there is the chance the floodgates will open and corporations can use this cash for strong growth.

It is easy to say that things are different this time around, but I think the future also can prove reasons why stocks are a great long-term investment. For our largest 500 companies in the U.S., around 45 percent of their revenue comes from outside the U.S. I do not think the U.S. will grow like it did in the 20th century, but I think growth around the world will be stronger in the 21st century than the 20th century.

As countries around the world grow, they will be buying more Coca-Cola, McDonald’s, Caterpillar bulldozers, Boeing jets, GM cars, Disney movies, and Apple iPads. If you own stock in these companies you can benefit from this growth overseas.

I believe the next five to 10 years are going to be rough. Unemployment will remain fairly high, the stock market will be up and down. People will continue to question their investments. But we are going through a market cycle, and every time in the past there always has been a recovery after a decline. I think there are forces in place that can make our next recovery very strong.

For me, as I have time before I retire, I will stick to a mutual fund that mimics the market. If I needed some of this money in the next five to 10 years, I would be moving funds into safer investments, but since I have time, I will let it ride. No matter what happens day to day, I will continue to be a long-term optimist, just like Churchill.


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