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A Dose of Reality
We’ve been suffering through a miserable bear market for almost three years now. In many cases equity investors have lost significant portions of their net worth and, probably worse, they’ve lost hope. We’ve seen earnings plummet, we’ve seen corporate insiders bilking their companies out of billions of dollars and we’ve seen a lack of moral fiber in the accounting industry. It was once said that, "The concerned investment banker is the one who blows the horn on his Mercedes as he drives through a red light." It’s a fitting quote for our market. For the most part, things look pretty grim. The markets ran like a banshee throughout the nineties and now we’re paying the penance.
If you’ve ever studied the markets, you realize equities don’t go straight up. For those of you who just started investing in the nineties, this probably comes as a bit of a shock. But, markets, like the economies, run in cycles. Over the past fifty years, the equity markets have averaged around 10-12% per annum and you typically saw a bear market one out of every five years. These aren’t numbers you should set your watch to. However, you should look at them as broad guidelines for what to expect from the markets on a macro basis. The reality is we saw a tremendous run from the mid to late nineties and equities simply became overvalued. Now, the markets are adjusting to a slower economy and inflated valuations. Here’s the good news; the stock market will rise again. I’ve got a hundred years of market history to back what I’m saying. The markets go up, the markets go down and then they go up again. I don’t know if we’ll begin a new bull market next week, next month or next year. But, with a strengthening economy, it’s simply a matter of time.
The saddest part of this horrible market is that many investors are scarred for life. Some investors are so shell shocked that they’ll never return to what has historically been the best place to grow your hard earned dollars. Possibly worse, many growth oriented investors, out of frustration, are moving to bonds after bonds have been in a three-year bull market. As things get better economically, interest rates will rise and this is a big negative for bond investors. That’s not to say bonds aren’t a good place to invest. But, the timing is backwards. If the economy continues to improve, equities will rise and bonds will most likely sell off from their current levels. Thus, these investors are setting themselves up for the double-whammy. The point is this; common sense (and 20/20 hindsight) tells us that the stock market was overvalued going into 2000. Most investors were driven by greed and chose not to see it. The markets corrected. But now, the reality of the markets is that the next five to ten years could be an extraordinary time to be invested in equities. We’ve seen valuations come down significantly by historical standards and corporate earnings are solidifying. Most investors don’t have the stomach to be investing in equities right now but it’s a mistake to avoid this area. I’m not saying you should be mortgaging your home to buy stocks. I’m saying the market’s on sale and now is the time to be building an exposure in equities. Whether you’re dollar cost averaging into your 401K or have your entire portfolio in cash, you need to focus on the long-term picture and look to the long-term potential of equities. Remember; when things look there worst, they’re probably getting better. |
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