I have a family who thinks I'm nuts. What they are griping about is my fixation with the stock market. You see, I have a daughter who's with the Alan Greenspan office, a son who's an accountant, and wife from a lineage in banking. What they have done recently is to move funds out of stocks and into bonds. The rationale? "Look at what the stock market has been doing, or not doing."
Okay, for them. I don't buy it. I think they are running on emotion--too afraid of these short-term losses that they can't see the forest for the trees. (Should start a good fight when this column is published.)
Listen, we certainly know what has happened recently. There's been a president impeached, an election which is still being disputed, the first attack on America since 1812, a recession, and all topped off by a rash of business and accounting scandals. What did you expect, Disneyland?
Most financial gurus will tell you that while stocks are kind of tricky over the short haul, investors are better off buying and holding them rather than trying to time the marketplace. It's been said by far smarter people than me that bear markets are unpredictable and trying to guess what will happen is a fool's errand.
Keep this in mind. Ibbotson Associates, a Chicago research firm, says that from 1926 until last year, the average annual return, after inflation, of the large-cap stocks of the S&P 500 was 7.6 percent. Compare that with Treasury bonds at 2.2 percent. You can do the math. Stocks return three times more than bonds. Thanks to compounding, after let's say 30 years, an investment of $10,000 in stocks will grow to more than $90,000. Bonds? Less than $20,000.
Also consider this. Over the past 200 years, taking the worst 20-year period ever, stocks rose more than 20 percent. Bonds with their worst 20-year stint? A loss of 60 percent. Why is that? Because bonds can be risky too. Nearly all of them are exposed to inflation, which erodes principal. In such times, businesses can raise prices so that stocks tend to suffer less than bonds.
Also, stocks increase their earnings fairly regularly while bonds pay a fixed rate of interest, which is almost guaranteed to decline in purchasing power with inflation.
What do I think will happen? I don't know. My guess is as good as yours, but I am optimistic. I think that the economy, according to my daughter's boss, is growing and that I believe will drag companies' profits and its share prices, back upward. I'll continue to hold onto my JetBlue, Wal-Mart, Disney, GE, BellSouth, Tasty Baking and of course, SunMicro. Oh sure, I know about asset allocation, and I have bonds too as well as mutual funds and other stuff. But, family or not, I ain't packing it in on stocks.
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