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Seven reasons why I’m solid with stocks

These are crazy times for stocks and challenging times for investors and it has meant that many scaredy cats have run to cash, which can be understandable if your super is running out. But if you’re in stocks and your super is reasonable, there are plenty of good arguments to stick solid with stocks.

For obvious reasons – check out the 22 per cent slide in shares since 17 February, which were pared back by some recent rallies – I have been reminding investors of why stocks have been good money-making vehicles.

In case you’re wavering on being long shares, the following is eye-opening reading for the long-term investor who doesn’t want to lose the faith on the basis that the very moment they sell, the market will take off. By the way, I’m long the market but I think the Europeans have to do a lot more before we see a big rally. That said, a big one is going to happen and I’m prepared to cop the paper losses and pocket the dividends until that happens.

Seven reasons for sticking to stocks

Here are my seven seriously smart reasons for sticking solid to stocks.

Reason #1

History shows that seven out of ten years is good for stocks and we’re now giving history a nudge as we move into the fourth year since the GFC started in October 2007. Of course, the past two financial years have seen shares actually rise between five per cent and six per cent, and when you add in dividends, a good portfolio with a bias towards income would have returned 10 to 12 per cent.

Reason #2

I love this one – Stan Stovall from S&P Capital IQ, pointed out that we have a once in a blue moon event happening, which historically is good for shares. He says when the collective dividend yield on the S&P 500 index going forward is greater than the yield on US 10-year government bonds, stocks tend to rebound 20 per cent on average in the ensuing 12 months!

Reason #3

Michael Knox, the chief economist at RBS Morgans made the point on my SWITZER program on Sky News Business Channel that based on company earnings of US companies, the index should be 30 per cent higher and the same goes for our S&P/ASX 200. He concedes that the European debt issues have to be sorted, but if they can, there’s an enormous stock rebound waiting to happen.

Reason #4

Rudi Filapek-Vandyck of FNArena made a great point on my program, which underlines his philosophy on shares, which also aligns strongly with my own. He looked at investing in David Jones and Rio Tinto since 2003 with one million dollars. If you had gone for that great company Rio, that $1 million would now be $2.4 million, which is about 140 per cent return, which is not bad.

But what would have happened if you had punted on David Jones? It would be $4.5 million, but earlier this year the figure was closer to $6 million! Rudi argues that capital gain eras come and go but the value of being an investor who chases income is a sound strategy all of the time but especially now.

Reason #5

Vanguard has shown that if you invested $10,000 in shares in 1970 and let it rollover, re-investing the dividends, by 2009 the value of your investment would be around $453,000!

Reason #6

This is one I always remember. Paul Clitheroe’s book Making Money showed a US study by a university professor who revealed that timing the market is for mugs. The study by Professor William Sharpe of Stanford University in 1972 basically confirmed that if you changed your investments annually based on current market perceptions, you would have to be right 70 per cent of the time to increase your portfolio’s value.

Paul looked at what you received if you remained fully invested between 1979 and 2006 and the average per annum return was 11.4 per cent. However, if you were playing the in and out game and you missed the 10 best days, your return dropped to nine per cent! If you missed the best 40 days, the return plummeted to a tick over five per cent!

By playing the long game, you saw a return from shares around 11 per cent but if you tried to time the market and missed some of the big days on the stock market, which often happens when investors get fed up and run to cash, your returns fell markedly. The conclusion was time in the market is better than trying to time the market.

Reason #7

The AFR recently looked at someone who put $100,000 in super in mid-2001 and saw his nest egg grow to $170,000 by late 2007 and then drop to $150,000 four years later – that’s a total of 10 years.

So for 10 years the return on $100,000 was $50,000, which was described in the article as “hardly the stuff of golden retirement dreams”.

However, Morningstar makes the point that Aussie shares have returned 10 per cent a year over the past 25 years while cash returned 7.4 per cent.

Robin Bowerman of Vanguard Investments says the median return of our shares from 1950 to 2010 was 12.9 per cent and the worst 20 years to February 2009 still came in with an 8.4 per cent result!

Let’s go back to the first example. The $100,000 to $170,000 in six years was a return of around seven to eight per cent but then came along the worst market crash since the Great Depression and the return dropped to around four per cent, which is not too bad given the circumstances and is around what you would expect from term deposits over that period with no real risk.

And that’s my point. With shares – provided they are quality ones that pay good dividends – you hover between what you get in cash or term deposits and the chance for the periods where the returns are 10 to 12 per cent.

This is my final telling point. We began with an assumption that someone started with $100,000 in mid-2001, but if that came from previous investments, which were largely cash, that starting amount might have been $70,000! 

Stick with great quality stocks and stick like glue.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

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.

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Published on: Wednesday, October 05, 2011

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