Many of us might have held back on investing in stocks, either a little or very much so, over the past few years on the assumption that things have been just too precipitous all over the world. Especially for those who held back a great deal or even completely, here are a few things that may have escaped your attention:
- In 2009, the Dow Jones Industrial Average (DJIA) was up 22.7%; the S&P 500 Index was up 26.5. But as good as those figures sound, many mutual fund investors had the opportunity to do far better. For example, investors in Large Cap Growth funds averaged 35.0, Mid-Cap Group 40.4, and Small Cap Growth 36.2. Investors in diversified international funds earned 32.7. In fact, most other fund categories beat these indices as well. (All performance figures as cited in the Wall Street Journal.)
- This past year (2010 thru 12-30-10), the DJIA was up 10.9 (not including dividends) while the S&P 500 Index was up 15.1. But once again, many mutual fund investors likely did even better. Small Cap Growth funds averaged 28.5, Mid Growth 26.3, and other small and mid cap categories also excelled but by not quite as much.
Thus, anyone keeping the faith over the last two years has been well rewarded. It once again seems to demonstrate the under-recognized axiom that whenever we are most bombarded by what appears to be the worst kind of fear-inducing/confidence busting conditions in the markets, the markets often surprise most everyone by doing just the opposite as might be expected. For as long as I have followed the markets, it seems that a good way to do well has been based loosely on the principle: "What you see is not what you get. Or, to put it another way, it is especially important to heed: Don't let emotions drive your investing and "don't follow the crowd."
For the last 13 1/2 mos., that is, since Nov. 12, 2009, we have been quite positive on the prospects for nearly all categories of stock funds on our funds-newsletter.com website, as well as at safehaven.com. Back then, we emailed an Alert to subscribers and posted the Alert on our site. In it, we indicated that our research suggested all major categories of stock funds should be considered BUYS.
Subsequent to the initial broad BUY recommendation, in our Jan. 2010 Newsletter, we raised our recommended overall portfolio allocation to stocks to 57.5% for Moderate Risk investors, and to 75% and 30% for Aggressive and Conservative investors, respectively.
Note: We also made even earlier BUY recommendations for Small Cap Growth (Jan. 31, 2009) and Large Cap Growth (Oct. 8, 2009). Here, the results have been even better. Specifically, using the two Vanguard Index funds that we have been recommending in our Model Portfolios, which are also close proxies for the average return for all funds in these categories, one's returns for those who bought immediately after our signals have thus far earned returns of approximately 100% in Vanguard Small Cap Growth and 25% in the Vanguard Growth Fund (VIGRX).
Throughout 2010, we remained highly positive on stocks for most investors, with our most recent portfolio (Oct. '10) recommending an increased allocation to stocks for Moderate Risk investors and for Aggressive investors, bringing the total for these investors up to 62.5% and 85%, respectively. Even with the elapsed time since our Nov. 2009 Alert, 7 out of the 10 major fund categories recommended then remain in what we consider BUY territory. The remaining 3 (Large Blend, Large Value, and diversified International Stock) are currently classified as HOLDs.
Long-term readers of my Newsletter can attest that since we began our Portfolios back in 2000, we have not frequently called for such high allocations to stocks. Therefore, our late '09 through all of 2010 predominantly bullish calls should be regarded as that much more significant, especially as compared to many forecasters who tend to be almost always be bullish (or worse, bearish). For example, starting in April '08 and continuing thru the following year, we recommended a greater allocation to bonds and cash than to stocks for Moderate Risk investors; the S&P 500 subsequently dropped around 40% over the ensuing year. By July '09, this demonstrated high degree of caution was no longer the case as we raised our stock allocation.
Comments on the Overall Investment Environment
As implied above, we remain quite bullish on stocks prospects over the next several years, and especially over the next 5 to 10 years. It should be remembered too that we are not traders, attempting to capitalize on short-term market movements. So whenever we issue a recommendation, we are recommending that fund/category for periods of up to 5 years or maybe even beyond. Frankly, we cannot really tell, nor are particularly interested, in what the next 3 to 6 months might hold for stocks. In fact, our long-term track record shows we have been most successful in predicting which categories of stock funds will do well after 5 full years; our 3 year performance record, while still quite good, is slightly less strong; the same is true for our 1 year record.
We realize, though, that such relatively short-term considerations are exactly what holds back many investors; they seem to want near total assurance that prices won't drop over the next 3-6 months in order to feel secure in making new investments. While understandable, I would suggest that one give up on the idea of getting that kind of assurance. It only helps to take your eyes off what should be the more important target - what fund prices will be like several years down the road. To be a successful investor, one simply has to be willing to accept the fact that over the short term, stock prices will vary considerably, and often unpredictably. But over the longer term, while there are never iron-clad guarantees, your odds of success should be quite high whenever you elect to invest when conditions, especially undervaluation, suggest that an asset category is below where history suggests it should be and economic fundamentals are improving. We believe we are in such an environment now.
We suggest that most long-term investors not focus on what "might" happen over the next 6-12 months, if that can even be predicted at all. Rather, we suggest focusing on the longer-term outlook several years ahead. While this is still relatively unknowable, we believe it makes more sense to think about potentialities than deficiencies in investing (or anything else).
We do worry about the size of the US deficit and consider that there is a chance that Congress and the President will not choose to come to grips with it. We fully expect that political gamesmanship will actually bring us to the brink of the near terrible repercussions which will follow if creditors lose confidence that we can continue to make good on our obligations. Evidence suggests that it is only once we are "on the brink" that our elected representatives will finally start taking the necessary steps to get our financial house in order. Thus, our longer term bullish outlook can prevail as to why stocks can do reasonably well in spite of all the troubling things we see around us. (It should be mentioned too that we agree with many economists that the extension of the Bush tax cuts, extended unemployment benefits, and the 2% reduction in Social Security taxes, all of which unfortunately still "borrow" from future monies, will certainly add some current stimulus to the economy.)
We see diminished, although not flat-out bad, returns on the longer-term horizon for bonds. One very troubling corner of the bond market is municipal bonds. States and local entities that issue these bonds are going to have a great deal of difficulty in raising the required funds to provide services and to pay for promised pensions. The likely result (especially since the Federal government has apparently dropped a subsidy whereby they were paying part of interest on state-issued bonds) could be lower muni bond prices. Therefore, we recommend a somewhat cautious and limited allocation to muni bonds for the time being. We continue to favor corporate bond funds in general over government bond funds, which include municipal bonds.