$1 Million Invested in Stocks in 1935 is Worth $2.4 Billion Today (If You Held On)
The calls to dump your bonds and switch to the stock market are beginning to reach a perfectly intense pitch. Take my lunch with Bel AirInvestment Advisers this week, who believe there is potentially a trillion dollars in cash on the side lines waitingf to gain the confidence to invest in the stock market. These former Goldman Sachs partners feel this is a once in a lifetime opportunity to get in the market-- and I have to say their arguments are convincing. Evewn if their bold finding that any invewstor with $1 millin in the market who hewld on through depression, world war, Opec hikes the price of oil, natural disasters, impeachment of Presidents and huge corporate scandals would have ended up with $2.4 billion. The point being stocks paid off over 8 decades with a compound rate of return over 10%. Not exactly chopped liver-- if not the 20% earned by the Oracle of Omaha, Warren Buffett, who has made 20% compounded since the 1970s. (Nice gains for Heinz shareholders today, clearly signaling consumer food stocks might be somewhat undervalued) Here are the clarion calls for investors to shuck their nlow yielding but safe government bonds-- and shift the money into 1. The 30 year bull market in bonds must be edging its way to an endsgame-- making ripe the opportunity to begin switching out of bonds into stocks. Investors in the 320 yewar treasury have alrady lost in market value the 3% plus coupons on their holdings. The next move up in interest rates will mean another incremental loss of value. Same for the benchmark 10 yeasr treasury, which has risen in yield to the 2% mark, wiping out values as the old notes decline in value to yield 2%. (bond prices move in an inverse relationship to interest rates) 2. Then, there's the fact that stockholdings by the public have fallen to 30% of household wealth. This could be the tipping point for the stock market believe Bel Air. After all indivuduals hold only 18% of their wealth in common stocks-- down from 28% in 1980, the other previous low point. Mutual funds, pension funds and the like are just 50% in stocks, down from 68%. At cocktail parties in glamorous Hollywood, no celebrity cares to hear about the stock market, they have become so disillusioned. To be fair and accurate Bel Air are not going hog wild with the $7 billion in accounts they manage. Rather, the average individual account is still only 35% in stocks and 65% in fixed income. But, the argument for stocks and against bonds, which is on its way to The New Normal-- though not yet a crescendo-- is building a certain rational momentum. It's philosophic underpinning is that the time has to come to stop playing it so conservative and safe (after the nightmare of near Armageddon) and take some incremental risk with your money. Bel Air wants it known you have more to lose in bonds and more to gain stocks. 3. Concentreate on the differential in trhew income yields between bonds and stocks. Since 1955 we are witnessing the lowest marketplace returns from bonds, against the the highest return in dividends. There have been few such salient opportunities to buy stocks when they yield more than the 10 year Treasury note. And let me add that the average increase in cash dividends by the 500 corporate members of the S&P index during 2012 was 22%. That aint exactly chopped liver either. 4. Don't fight the Fed. You may have heard this before-- but it's never been more true than today. Chairmann Bernanke has made it crystal clear that Quantitative Easing-- the constant pouring of money into the financial system is meant to drive up asset prices-- on assets like stocks and residential homes. Some form of QE is promised until unemployment falls to the 6.5% level. Cheap money, low interest rates, are meant to help household wealth rise. This could mean another 3 years of pumping money into the economy. 5. Bel Air's top brass believes the market indexes will gain from 9% to 12% in 2013 and could double in 10 years on 7% compound annual growth. And be aware the stocks being recommended are giant multinationals like Exxon, Coca-Cola, Microsoft, Merck, General Mills, Campbell Soup and Proctor & Gamble. And if you don't know Bel Air, the principals' former alma mater, Goldman Sachs, has just predicted that 95% of all commonn stocks will outperform government bonds over the next 5 years.