Companies with global presence could be good bet
Posted By Admin on January 4, 2012
Dec. 24, 2011 |(0) Comments
As 2011 comes to an end, those invested in stock funds dont have much to show for the volatility theyve endured throughout the year.
As of Friday, the Samp;P 500 index had a total return of 2.7% for the year, down from a high of 9.1% in April but up from a low of negative 11.3% in October.
If a lot of volatility without much progress is a familiar feeling, thats because 2011 is a microcosm of the past decade.
A decade or so of treading water combined with news of a slowing global economy, fraud on Wall Street and incompetent politicians, leaves more and more investors wondering – why should I bother with stocks?
A big part of the problem has to do with our home bias – the tendency to focus and invest where we live.
The developed world is struggling with significant structural problems, such as an aging workforce and excess government indebtedness, which make it easy to overlook investment opportunities.
While the developed world struggles, the emerging world is experiencing an economic renaissance.
Whats important to know is that the emerging world is home to 80% of the worlds population and now accounts for about 50% of world gross domestic product and 70% of the worlds economic growth, according to the International Monetary Fund.
While its easy to get caught up in all the bad news coming out of the US and Europe, the world is enjoying an unprecedented growth spurt. The best way to participate in this growth is to own shares of companies that will benefit from a growing world economy.
401(k) investors have a built-in advantage when it comes to investing in the stock market because they make regular purchases through payroll deduction.
Regular purchases with a fixed-dollar amount of an asset with a variable price is called dollar cost averaging. When the price dips lower, you acquire more shares. When it moves higher you acquire fewer shares.
Over time, dollar cost averaging lowers your average purchase price, reduces risk and increases your return.
Long-term 401(k) investors benefit from price declines because they offer the opportunity to acquire more shares for long-term appreciation.
Tired of all the ups and downs and looking for a guaranteed return? Interest rates have been falling for the past 30 years. Today, money market funds are at record low yields, with most paying well below 1%. Typical bond funds, which carry interest rate risk, have seen their current yield drop to between 2% and 3%.
Record low interest rates mean record high bond prices. That means increased interest rate risk because, when interest rates head higher, bond funds will be fighting against a tide of declining asset values.
Meanwhile, at about 11 times expected earnings, US stock prices are cheap relative to their history.
In the end, stock prices are a function of corporate earnings. If you believe, as I do, that the world economy will continue to expand at a respectable pace, there have been few better times in the past 30 years to be buying.
Theres good reason current stock prices are low relative to their expected earnings and interest rates.
The worlds capital markets are fraught with risk. Certainly the situation in Europe could go from bad to worse. And with Congress spending money like a Packer fan in the Lambeau Field pro shop, the US could suffer the same fate if things dont change.
So if an investment in the stock market means youre going to lose sleep every time theres more talk about the potential for the euro to disintegrate, or deadlock in Washington, then stay away. Its not worth it.
Also, as a rule of thumb, as you get within 10 years of needing the money, you should begin gradually shifting assets away from the stock market so that you can be confident theyll be there when you need them.
Even with stock prices seemingly depressed, is there risk? Absolutely.
However, the world is undergoing a fundamental shift in economic drivers, and your 401(k) plan encourages a disciplined approach to buying stocks during market downturns that will enhance your long-term returns.
Therefore, the higher exposure you have to stocks, the higher the long-term rate of return you should earn.
Michael J. Francis is president and senior investment consultant of Francis Investment Counsel LLC, a registered investment adviser based in Pewaukee. He can be reached at michael.francis@francisinvco.com.
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About this
The material in this column is provided for informational purposes only. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Francis Investment Counsel does not offer personal tax or legal advice.
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