Streetwise

Lauren Rudd

Sunday, June 8, 2014

Don't Ever Ring That Bell

Although June is known for many wonderful things, historical kindness to the financial markets is not one of them. While June might play host to weddings, Father's Day, Flag Day, D-Day, the start of summer and the end of school, the Stock Trader's Almanac lists June’s post World War II average return at -0.3 percent.

And if June did not have enough bad karma, I have been bombarded of late with the same series of questions: is the stock market too high, too volatile, is it going “crash,” and do I still recommend investing in stocks. Crash...why should the stock market crash and what do you mean by crash? Is a 5 percent correction a crash, what about 8 percent, or 12.356 percent?

The only so-called crash to happen in my 40 plus years on the Street was in 2008, which while painful was far from fatal, especially if you adhered to the mantra of only investing in companies that not only pay dividends, but have been raising dividends for a minimum of 10 consecutive years.

Is the market ever too high? Was it too high when the Dow Jones industrial average crossed 2000 or 3000? What about when it crossed 5,000 and then 6,000? As long as companies grow, increase their earnings and reinvest those earnings (compounding), their share prices will continue to move inexorably upward.

To that end, the economic data of the past week had Barclays raising its estimate of second-quarter economic growth to a 3.0 percent annual rate. Macroeconomic Advisers lifted its forecast to 3.9 percent from 3.8 percent, while Goldman Sachs upped its estimate to 3.8 percent.

No investment vehicle can rival the track record of common stocks as a way of accumulating wealth. Unless you are flat broke, lying on your death bed, and have no heirs, you need to have some portion of your financial assets in equities.

Does investing in stocks entail risk? Of course it does. Even the largest and most successful corporate monoliths are vulnerable to adversity. However, unless you have access to inside information, it is impossible to predict stock prices short-term. Using inside information removes the uncertainty, but also means trading pin stripes for that less tailored stripped look.

So why are bonds not the answer? One key reason is inflation. Debt securities, once they have been issued, do not gain in value at maturity. When a bond comes due you will be paid the bond’s face value--no more, no less. The interest rate you receive is also fixed. Your return is not inflation protected, nor do you participate if the issuing company’s fortunes improve.

And it gets worse if you are on the cusp of a rising interest rate environment, which I believe we are. As interest rates rise over time, and only a naïve person would suggest otherwise, the principal value of bonds will decline, meaning if you sell you take a loss.

When you hold a company’s stock you are an owner of that corporation, not a debtor. If the company prospers and grows then your investment will see a corresponding increase in value. It is for this simple reason that stocks have historically outperformed any other investment.

More importantly, as a shareholder you are tying yourself to the fortunes of a particular company, not to the daily fluctuations of the overall market. Worrying about where the “market” is on any particular day is an exercise in futility. The investment world overreacts to almost any piece of news, good or bad. Bad news simply means that stocks are on sale that day.

Finally, if your portfolio is not performing up to your expectations, if you dread looking at the closing Wall Street numbers, let me leave with a few words written by Admiral William H. McRaven, ninth commander of the U.S. Special Operations Command.

In an article titled “Life Lessons from Navy SEAL Training,” he wrote that in the Navy SEAL training compound there hangs a bell for all to see. Ring the bell and you no longer have to endure the hardships of SEAL training. Just ring the bell and it stops. However, if you want to change the world and improve your life, don’t ever, ever ring that bell.