By Neil Eigen and Rich Rosen, Senior Portfolio Managers,
Columbia Management
If the buy low/sell high investing maxim is self-evident, why don’t more investors do it?
In 2007, corporate pension funds had close to 70% of their assets in stocks (when the market peaked), yet at the bottom (in early 2009), bonds and cash accounted for more than half of the mix.* For many individuals, the results were probably even worse. As an investor, how can you avoid being part of the buy high/sell low crowd?
The key to investing is first having an understanding of the market and your own needs. History has shown that stocks outperform bonds and cash, so for most of us, equities deserve an allocation within our portfolios. Over the past 100 years, the S&P 500 has returned just under 10% per year, compounded. (Needless to say, the Great Depression, the 73-74 stagflation/oil crisis, crash of ’87, Y2K tech wreck of 2000 and the 2007-2008 meltdown are all included in this calculation.) So, in spite of recent market gyrations, one should be optimistic about stocks, because history favors bulls over bears. As long as you can avoid panic selling and buying, the returns are pretty attractive over time.
So, how much stock should you own?
At a minimum, your exposure to stocks should be commensurate with your ability to go through one of these periodic downturns without succumbing to the inclination to sell low. Since 1960, the market has fallen roughly 25% on five separate occasions, or about once every ten years, and when that happens, it hurts.** Even so, remember that peak-to-trough decline in the market of 50%+ in 2007-2008? In case you missed it, the Dow, Nasdaq and S&P 500 are all higher today than they were five years ago (including dividends).
With respect to choice of fund, our bias is toward value, though most will work over time. Just stop chasing last year’s winners (buying high). The current rage is income-oriented funds, which have done well, and in many instances these funds were bought (and managed) as bond substitutes. As we see it, the dividend yield on the S&P 500 is roughly 2% today, so in order for the market to deliver that near 10% historical return, both dividends and earnings growth will be needed. Our bias is toward companies that can grow their dividends and payout over time because of strong earnings growth.
The point is that fundamentals are more important than themes. Some people can time the markets, but that probably doesn’t apply to us, or you. We prefer a simple, ‘get rich slow’ strategy, which may be possible if you maintain a disciplined investment approach in concert with a reasonable set of expectations. Patience and discipline are important virtues when it comes to investing.
See more Market Insights from Columbia Management.
*Source: Wall Street Journal
**Source: ISI
The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
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