Wealth Matters: Reasons to Avoid Buying Stocks, and Why You Should Ignore Them

The list, adding up to 78 for each of the years from 1934 to 2012, was compiled by Bel Air Investment Advisors.

But the punch line to this list was that stocks went up by an annual compounded rate of 10.59 percent over those 78 years, with occasional plateaus, and that $1 million invested in 1934 was worth $2.4 billion in 2012.

As for the last three years, the list singled out the European financial crisis in 2010, the downgrade of United States’ credit rating in 2011 and the political polarization of 2012. Investors were, in fact, generally reluctant to buy stocks. Yet in each of those years, stocks either rose in value or, at worst, were flat.

The reason for such hesitancy is obvious. Investors are still scarred from the 2008 crash and they perceive stocks as risky, a feeling reinforced by a good bit of volatility in the markets in recent years. Yet as stocks rallied earlier this year, money from individual investors began to trickle back into equity funds. This could be good for an intrepid few.

“The stock market is the same place it was in 2000 with double the earnings,” said Todd M. Morgan, senior managing director at Bel Air Investment Advisors. “Stocks are set to outperform bonds over the next three to five years.”

This may very well be true, but most people still think fearfully about stocks. What would it take to get more people to buy stocks? And by this, I don’t mean going all in as investors did in the late 1990s, but creating some semblance of a balanced portfolio.

Mr. Morgan and other advisers said that investors are being misled by talk about near-record levels for the Dow Jones and Standard Poor’s 500-stock index today. When adjusted for inflation, the levels approached earlier this year are not true highs. A new high for the Dow, for example, would be around 15,600.

What is more telling are the earnings and dividends of companies. Niall J. Gannon, executive director of wealth management at the Gannon Group at Morgan Stanley, calculated that the dividends on S. P. 500 stocks were $15.97 in 2000 and $31.25 in 2012. Earnings per share were $56 in 2000 and $101 in 2012. In other words, two major measures of a stock’s attractiveness have doubled in the last 12 years, but the index has not kept pace.

“A big mirage is going on in investors’ minds,” Mr. Gannon said. “They think stocks are expensive because they’ve used index levels as the measure.”

And investors aren’t confident that stocks will continue to rise, given the volatility in recent years. They may well fall in the short term, but over the next few years they are more likely to give investors a better return than bonds. Mr. Gannon pointed to an earnings yield on the S. P. 500 of around 7 percent.

But these are rational arguments for individual companies. They do not account for concerns that the actions of the Federal Reserve have skewed stock prices, another rational fear.

Michael Sonnenfeldt, the founder of Tiger 21, an investment club whose members each have at least $10 million to invest, said the feeling from the group’s annual conference was that the 14,000 level on the Dow was worrisome because it could be the result of all the money the Federal Reserve has put into the system and not based on company fundamentals.

The group, he said, was also worried that the Federal Reserve, having kept interest rates artificially low for so long, could have created a situation where investors suddenly demand higher interest rates at a government bond auction. A crisis like that could lead to deflation, and not inflation — where stocks are considered a hedge.

What’s telling is that Tiger 21 members reported increasing their allocation to equities by 3 percentage points in the last six months. “It’s not a stampede,” he said. “The focus has been on dividend-paying stocks, not growth stocks or tech stocks.”

For people with far less than $10 million to invest, the catalyst to buy stocks will probably be losing money in the bonds they own. “Over the last three years, you’ve lost out not being in stocks,” said Bernie Williams, vice president of discretionary money management at USAA Investments. “But you still made money in bonds. From that perspective, investors are not really feeling the pain.”

Article source: http://www.nytimes.com/2013/02/23/your-money/reasons-to-avoid-buying-stocks-and-why-you-should-ignore-them.html?partner=rss&emc=rss