Don't Abandon Stocks
By Joseph Lisanti
This is the type of market that can cause investors to become disgusted and throw in the towel. The almost daily change in direction may be ideal for traders, but can cause those with an investment horizon that extends beyond the next few hours to fret that stocks are not an attractive asset class for the long term.
After the bubble burst in early 2000, some people abandoned stocks to find their new investment passion in real estate. Yet, over the past eight decades, no other asset class has offered both the inflation-beating returns and the liquidity of common stocks. Looking at the most recent five years, that notion may be a bit hard to swallow. But if you extend your search over 10 years, profits in stocks are easier to see.
From 1926 through 2004, you had a 12% chance of losing money in the S&P 500 in any five-year period, but only a 3% chance of loss in any 10-year interval. Extend the time frame to 15 years, and there were no losses experienced.
A quick look at a long-term chart of the stock market can provide visual confirmation. Although far from smooth, the chart of the S&P 500 traces a gradual advance over the years. Even the October, 1987, crash looks minor when viewed in its long-term context.
British economist John Maynard Keynes famously observed, "In the long run we are all dead." True, but an investment horizon of ten to 15 years is not unreasonable for baby boomers preparing for retirement. Younger investors can be even more patient.
Although we started the year with modest expectations, 2005 is unfolding as a more difficult period for stocks. As a result, we have lowered our yearend target for the S&P 500 to 1245 from 1300. That's still a 2.7% gain from the end of 2004. We continue to advise 40% in U.S. stocks and 20% in foreign equities.
Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook