Recently, I have had many client conversations on whether or not investing in or staying invested in the stock market is the right decision to take for their retirement accounts. There is this notion that the investment world has somehow changed. The 24-hour news cycle and constant conflicting financial media has made it so that buying and holding is no longer a viable way to invest one‘s money. Add the fact that the S&P 500 has seen very low returns for the past decade, and I can understand why people are frustrated and asking these questions.
Mark Twain once wrote that history does not repeat itself, but it sure does rhyme. In August of 1979 Business Week magazine wrote an article entitled “The Death of Equities, How inflation is destroying the stock market.” I encourage you to Google it and read the full article (4 pages). It is available on Business Week’s website (www.businessweek.com). With that being said, I have taken some of the main points from the article and compared them to what we currently are facing in today’s investment world. I think you will be surprised at the similarities.
1. People are leaving the stock market. 7 million investors defected from the stock market in the 1970’s, along with institutions being given the go-ahead to shift their assets from stocks to alternative investments.
In 2011, the mutual fund industry is on track to see more money coming out of equity mutual funds than what will be
invested in equity funds (net outflows). This is the fourth year in a row that we have seen net outflows, which has not happened in the history of the stock market, according to ICI.ORG.
2. Inflation has forced oil prices skyrocketing, leading to a deep recession. This has resulted in a low rate of return for stocks in the 1970’s. Before inflation took hold in the 1960’s, stocks averaged 9% in the 40 years prior, while bonds averaged less than half that. This situation reversed itself in the 1970’s with bonds returning more than double that of stocks.
In the past decade we have also seen oil prices increase dramatically, along with a major increase in food prices. This, along with the market decline after 9/11 and the collapse in 2008 has contributed to very low returns for the stock market. After appreciating more than 10% per year in the 2 decades before the start of this century, stocks have seen almost no return in the last 10 years. Bonds however have experienced a bull market, with interest rates falling to historic lows and bond prices rising dramatically.
3. Young investors are avoiding the stock market. Only one group of investors actually stayed invested in stocks in the 1970’s, older investors. The Business Week article actually claimed that older investors did “not understand the changes in the financial markets, or were unable to adjust to them, and decided to stick with stocks as a result.” The thought during this time was that we had entered a new financial age and that the old rules (of buy and hold) no longer applied.
The wisdom that my older clients gathered during the bull markets of the 1980s -1990’s enable them to be more patient in today’s investing environment. Young clients are skeptical of investing in stocks and have become extremely conservative, leaving a large portion of their money in cash. Between the availability of news, facebook, twitter, and other forms of social media many are claiming once again that we’ve entered a new financial age and the days of buy and hold are dead. I believe that younger investors are making the same mistakes that they did 30 years ago by being too conservative and not seeing the potential for another uptrend in the market.
4. Gold Prices! The government lifted the imposed ceiling on gold prices in 1971, and the result was a 700% increase in the 9 years that followed. The Dow Jones Industrial Average set an all time high in 1973, at 1051 and had fallen to 830, yes the Dow was at 830 when the Business Week article was written in 1979.
Just by turning on any television, passing any jewelry store, or looking in any newspaper the mania with buying gold is everywhere you look. Virtually everyone is saying to buy gold, or telling you how much gold has gone up. If you bought 1oz of gold in 1979, it would have cost $300. That same ounce could be sold today for $1,500. Pretty good return, right? Except that same $300 invested in the S&P 500 in 1979 (with dividends reinvested) would be over $9,000 today (according to Morningstar).
5. Debt is up significantly. From 1975-1979, corporate debt rose 36%, while total debt rose 42%. Residential mortgage debt also leaped by some 50% during that period.
Obviously, we have seen a huge increase in the debt of our country in the last 4 years. Just like debt and inflation was addressed in the early 1980’s by President Reagan and Federal Chairman Volcker, I believe these same issues that we are facing today will eventually have to be dealt with.
I think we can all agree that looking back over the last three decades that Business Week was colossally wrong to claim that equities were dead. In the history of investing, I doubt we have ever seen worse advice given. It is an unfortunate fact that more money has come out of stocks than has gone into them over these past four years. That leads me to believe that investors are unfortunately making the same mistakes again. It is not always easy to stick to your financial plan during the instability of today’s economy, but in times like these keeping an eye on history will help you stay the course. And if that doesn’t, give me a call. That’s what I’m here for!
Disclosures: Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
Investing in mutual funds involves risk, including possible loss of principal. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. Precious metal investing involves greater fluctuation and potential losses.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential loses.
