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When Headlines Contradict Content ...

July 08, 2013 | About:
It is advisable to side with the facts.

Every individual’s investment horizon really spans "the rest of your life." No matter how you decide to allocate your savings, you must do something with it.

Cash is merely the default choice. The Fed’s ZIRP has ensured that, over the long term, money in the bank will produce negative real (after inflation and taxes) rates of return.

The July 6-7, 2013, weekend edition Wall Street Journal ran an enigmatic article titled “The Case for Swearing Off Stocks.” Even the accompanying photo (a custodian sweeping up debris from the NYSE floor) put forward the notion that shares today somehow equal trash.

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WSJ columnist Liam Pleven quoted a few financial managers that, post-Great Recession, have drastically and permanently reduced, or even eliminated, their clients’ exposure to equities.

The following graphic carried the same title as the WSJ article. It was meant to explain, or perhaps excuse, those who had sworn off stocks as an asset class forever.

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The problem? The data showed that owning a $100,000, 100% bond portfolio produced $46,664 less in total return in the decade ended June 30, 2013. Even a 50/50 bond/stock mixture would have cost their theoretical investor $23,332 in missed gains after 10 years. On portfolios larger than $100,000 the difference in dollar amounts would be more exaggerated.

Earning 7.3% per year versus 4.5% represents a stunning 62.22% outperformance by stocks over bonds.

The past decade included some pretty rough patches for equities. The Fed-induced drop to generational-low interest rates made for one of the best environments ever for fixed income.

The facts behind the chart would suggest a title leading investors to overweight stocks, not the reverse.

Mutual fund holders collectively did exactly the wrong thing from 2008 right through the present. Foolish people pulled money out of stock funds while buying bond funds. They steadfastly compounded the damage from this error even as the broad market ran up almost 140%, plus dividends, since March 9, 2009.

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Okay, that only shows what happened for a bit less than four and a half years. How did stocks do over the really long term? I’m glad you asked.

Well-informed investors know that the recent results mirrored those from the past 25 and 35 years as well. The chart below shows results through April 30, 2013. The equity return numbers would look even better if they were calculated today.

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After perusing the facts I have to think it was a disservice to readers when the WSJ made the case for swearing off the asset class that performed the best.

Disclosure: The bulk of my own net worth is invested in equities. I own no bonds.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 4.1/5 (10 votes)

Comments

vivekjain57
Vivekjain57 - 1 year ago


Excellent Article !
sww
Sww - 1 year ago
In mutual fund industries/institutional investor :

What do you do as a manager when one of your holding company was hit with a potential lawsuit?

Sell first and think later.

Say, PM/MO in 80s/90s, potential class action. How many fund managers can sleep at night if they continue to hold MO? What they worried is if they hold the stock and they are wrong, they will lose their job. Replace MO with MCD when mad cow disease in 2003/2004 or WFC/USB/AXP (Buffetts' beloved banks) that are selling $8.5(WFC) $8.5(USB) and $12.5 (AXP) in 2009 spring?

It's all human nature. As Munger said, thinking is hard, that's why not a lot of people doing it.

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