Monday, June 1, 2015

Finance: Are Stocks Overhyped?

(Drivebycuriosity) -  "Stocks are consistently overhyped", declares the blog Pragmatic Capitalism (pragcap). The author believes that "the optimum stock allocation is much lower than most financial advisors would recommend" . In plain English, people should own less stocks. According to professor Tyler Cowen Americans hold just 22% of their savings in stocks (marginal).

 I think this number is way to low.

1. The S&P 500, a gauge for the US stock market, earned an average annual return (stock gains plus dividends) of around 10% since its inception in 1928 through 2014 (investopedia Thanks to the compund interest effect (reinvesting dividends) money invested in the stock market doubled every 7 years on average (bankrate). So, stocks beat other asset classes like real estate, bonds, gold& fine art by far.

Yes, in the short run stocks can be very volatile,  but - as the chart above shows - every correction & crash has been erased.  There was never a ten years period when investors in the S&P, who stayed invested over the whole time, lost money. So, stocks are perfect to save money for retirement and any long term goals (10 years and more)

You can easily invest into the S&P 500 by buying an ETF on the S&P 500.

2. Stocks are a perfect way to participate in the growth of companies and their profits. Investors benefit from the fact that companies are learning organism which get better and better every day. Most of the S&P 500 members are developing continuously new products and opening new markets while simultaneously reducing their costs. Therefore we can expect that profit growth, the engine of the stock market, will continue in the long run, at least as a trend. This will translate into rising stock prices because the value of a company is just the sum of its profits.

                                            A Golden Age For Stocks?

3. I believe that we are still in the beginning of a secular bull market, that could beat the glorious decade 1984-2000 when the Dow Jones climbed from around 1,000 to 10,000 points (the S&P 500 gained even more). Companies are benefitting from a new technological revolution (driveby ). Rapid advances in software & Internet (including cloud computing), robotics, 3D printing, nanotechnology, genetic engineering and other technologies are all lifting the productivity of the companies significantly and are creating new markets. I also believe that the technological progress is fostering globalization. Emerging countries like China and India have easier access to new technologies which is promoting their transformation into modern economies.

Stocks also will benefit from the ongoing catching-up process in low income countries like China & India. People in many emerging countries are working very hard and are saving & investing to narrow the income & wealth gaps to the wealthy "West". I further believe that oil and other commodities will stay cheap, like in the period from 1982 till 2000, thanks to new technologies which are  lifting the supply (like fracking) and curbing demand (more energy efficient cars, washing machines & other devices).

I think that these positive factors are working together and will amplify each other for many years to come, which leads to a golden age for stocks. Enjoy!

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