Stocks Still Best Bet for Long-term Growth

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Question:  I know that stocks have been going up after recovering from the crash in 2008-2009. I am starting to feel like it might be time to get out of the market, but I don’t know what else to invest in with interest rates so low. I am afraid stocks just aren’t good investments anymore.  What should I do?

Answer:  If you need growth to meet your long-term goals, you should keep stocks in your portfolio and never try to time the market.  It can’t be done. Like many investors, you learned two valuable lessons back in 2008: (1) stocks can go down as well as up; and (2) making money in the stock market isn’t easy – you should know what you are doing and have a plan. 

During the tech boom in the late 1990’s, people were planning early retirement based upon their expectation of 30% and higher annual returns.  People were in a frenzy buying stocks. 

I recall at my health club watching people glued to CNBC while exercising and literally cheering when their stock went up.  It was as if they were watching their favorite football team score another touchdown in a game that they were sure to win.  Or so they thought.  Many of their stocks are worthless now.  Their bubble burst in the spring of 2000.  It happened without warning, although there are many “Monday morning quarterbacks” who will be happy to tell you they told you so. 

The lesson to be learned is that stocks are volatile.  They go up and down – sometimes by a large measure as they did again in 2008 and early 2009. But over long periods of time, the stock market has always gone up.  The S&P 500 was up 13.7% last year and up 247.5% since it’s low point on March 9, 2009. Over the past fifteen years it has averaged 4.2% per year. Since 1925, the compound average annual rate of return for large company stock index has been over 10%.

My point is that a diversified stock portfolio is a good long-term investment.  Don’t give up!  Maintain a proper long-term frame of reference. To reduce the ups and downs, diversify even more by including bonds, often referred to as fixed income assets because they pay interest.

You should spend much more time choosing the allocation and the asset classes in your portfolio than you should picking stocks.  In fact there have been some convincing studies published that show that you have a better chance for long-term success if you pay more attention to how you allocate your portfolio between different asset classes and less attention on which stocks to pick.

You should decide on your long-term goals and then create a portfolio to match those goals.  If you need growth, include equities (stocks) using investments that represent asset classes like large U.S. stocks, small U.S. stocks, and international stocks. Use index or near-index quantitative funds because it's not likely that you can select only actively managed mutual funds that will beat the market. If you have high hopes for an individual company and you want to own shares of its stock, use that stock to supplement an index fund in its asset class, not as a standalone. 

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.