Hating Wall St., hurting ourselves?
There are many good reasons for average Americans to stay out of the stock market.
There also is one really bad reason, and unfortunately it’s one I hear too often from individual investors.
“They’re crooks. It’s all a scam. The little guy will just get fleeced. There’s no hope.”
This is a case of misdirected anger, or at least misdirected angst. In the aftermath of the economic and market cataclysms we’ve just endured, some people see stocks and the system that sells them -- Wall Street -- as some unholy alliance.
For others, what has happened over the last 18 months has simply demoralized them about markets in general.
But an Investing 101 refresher may be useful here for the sake of your nest egg’s long-term health, particularly as the global economy rebounds: The appeal of a stock is the potential growth of demand for the firm’s products or services . . . Nike’s shoes, McDonald’s burgers, Ford Motor’s cars, etc. You’re buying a business, not the financial system.
Investors’ misdirected anger is totally understandable. Wall Street -- the banks, brokerages, hedge funds, computerized trading systems and other players that make up the financial industry -- is the Evil Empire of our era.
The empire’s excessive risk-taking nearly brought down the system in 2008, until the government stepped in with its multi-trillions of dollars (our multi-trillions) to save it. The economic crash that ensued has cost tens of millions of jobs worldwide.
It also cost many people a huge chunk of their savings, if they were invested in stocks. The Standard & Poor’s 500 index of the country’s biggest companies plummeted a total of 57% from its all-time high in October 2007 to its low in March 2009, the worst decline since the Great Depression.
Mistrust, or outright hatred, of Wall Street has become ingrained in our national psyche. And what better way to reject the Evil Empire than to give up on stocks -- which is exactly what many individual investors have done over the last year, selling equities even as the market has rebounded.
Instead, a large swath of the public has put its faith in bonds over stocks. Over the last six months alone, mutual fund investors have pumped a net $193 billion into bond funds while selling a net $26 billion of U.S. stock funds.
Wall Street is the conduit for bonds, too. But bonds generally aren’t as risky as stocks, pay regular income and, to many investors, probably don’t seem to hold the same potential for manipulation by the Evil Empire (never mind about those subprime mortgage bonds that blew up the credit markets, of course).
Now, with major stock indexes at 17-month highs after climbing back for the last four quarters, it’s even easier to justify avoiding the market. If you missed the rebound, why bother now?
That may be the right decision, if you think stocks are overpriced at the moment relative to companies’ earnings. Or if you believe that the global economy soon will crash back into recession. Or if you just can’t chance losing a significant amount of money, even on paper, because of another short-term market dive.
But if you’ve lost long-term faith in stocks because of the damage wrought by the bear market and Wall Street’s many sins, consider the following:
* Bonds now have trounced stocks in terms of cumulative total return measured over the last 10 years. That’s the result of two deep stock bear markets in one decade, while interest rates have fallen (which boosted the value of older, higher-yielding bonds).
The average bond mutual fund gained 5.2% a year over the 10 years ended Wednesday, while the average domestic stock fund’s return in that period works out to just 1.1% a year, according to Reuters/Lipper.
If you think it’s smarter to look for investments that have lagged, rather than chase the leaders, would you bet on bonds or stocks to have the performance edge in the next decade?
* It isn’t important whether the equity market as a whole gets back to its 2007 highs any time soon. What matters from this point is how stocks fare compared with other investments.
I can assure you of one thing: The public’s disgust with, or fear of, Wall Street isn’t going to stop the big-money investors from continuing to look for opportunities in the stock market, just as they’ve done for the last year. If you aren’t in with even a small portion of your savings, you can’t benefit when the big players see opportunities that you can’t.
* If you swear off stocks, you give up on the asset class that offers the easiest way to cash in on worldwide economic growth, however modest it may be.
Bonds, remember, aren’t meant to be growth investments. They provide income and relative capital preservation. And if market interest rates go up -- which should happen if the economic recovery is sustained -- the principal value of previously issued bonds will drop. That’s a mathematical certainty.
A money manager friend of mine this week sent me a copy of a speech given last month by Thomas Gayner, the chief investment officer of insurance firm Markel Corp., at a New York conference sponsored by Grant’s Interest Rate Observer newsletter.
The Grant’s conferences are famous for attracting value-minded investors. Gayner, who oversees an $8-billion investment portfolio for Markel, had one central message in his very eloquent talk: In the face of the massive uncertainty confronting the global economy, stocks’ appeal hasn’t faded -- certainly not compared with bonds.
Stocks, Gayner said, “represent companies and managements and brainpower that seeks to face the challenges and opportunities that the world throws up, and respond accordingly.
“Darwin is often misquoted when he is referred to in the context of the survival of the fittest. What Darwin actually said was that ‘it is not the strongest of the species that survives but the one most adaptable to change.’
“Equities and the businesses they represent move and change, and give you the best odds you’ve got of surviving the fall and adapting to whatever circumstances present themselves.”
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tom.petruno@latimes.com
