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Why stocks rule, OK?

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by Peter Switzer

A slightly weaker-than-expected gross domestic product (GDP) figure for the USA in the final quarter of 2011 didn’t help Wall Street, however US consumer sentiment shot to an 11-month high and it looks like the Greeks will get its debt deal.

For those who like to know such things, the Dow fell 74.17 points to 12,660.46 while the S&P 500 dropped 2.1 points to 1316.33.

By the way, while January is often a great month for stocks, February is known for profit-taking, so stocks could struggle a bit. But who cares?

Traders do as they get in and out to make money and to avoid losses, but the long-term stock player needs to remember that stocks rule, OK?

In perspective

Now I know some of you might have been pretty peeved at what happened to stocks last year but let’s put it all into perspective.

Last year we kicked off at 4758.3 on the S&P/ASX 200 index and we finished the year at 4056.6 — down a whopping 14.7 per cent.

However on a financial year basis, which I always argue is the most important, as we pay tax on our investments and super on that basis, we have gone from 4612.2 to Friday’s close of 4288.4. So we are down around seven per cent. And this included the Greek and EU inspired madness of August-September last year, which threatened another Lehman Brothers-style GFC and the doomsday experts told us that the USA was going into recession. Of course, they were wrong.

Since October our market is up around 10 per cent but the Yanks are up over 20 per cent.

On a financial year basis, that is 2010-11, despite all of the anguish and gnashing of teeth, our market was up around seven per cent and if you throw in dividends, you should have made over 10 per cent, if your portfolio was as good as the index.

Let’s look at the financial year before and here the market was up around nine per cent and if you throw in dividends, we’re again over 10 per cent and probably pushing 12 per cent.

So during some of the roughest times for the USA, Europe, the world economy and while we have struggled with a two-speed economy and a misguided RBA interest rate policy, our market has returned better than 10 per cent per financial year.

Of course some people could be complaining that stocks have tumbled from 6828.7 in November 2007, thanks to the GFC and so we are still down 37 per cent because they were in stocks but this is only half the story!

Dotcom bust comeback

If you go back to the low of the dotcom bust in March 2003, the index was at 2700 and by the time we got to the start of the GFC we were up 153 per cent!

Right now we’re up nearly 60 per cent since that time. That’s over seven per cent a year and that does not include dividends!

Finally I would argue if the world had not gone crazy on cheap money, the index would never have been around 6828 before the GFC, it would have been more like 4000, which would have been more like a 10 per cent per annum jump in stocks, which is the number that generally comes up when you look at the long-run return from stocks.

This is a strong case to stick to stocks, despite the fear and loathing that can come your way when you read newspapers and tune into great shows such as SWITZER on the Sky Business Channel, which starts up tonight!

But there’s one difference here — I’m not programmed to look for bad news for bad news' sake.

*updates made to paragraphs 7-10

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Monday, January 30, 2012

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