Actually, the title of this article is misleading. Yes, now is the time to own stocks. But I would argue it is always time to own stocks.
What did you say? Aren’t stocks crashing? Crash is a pretty strong word, but yes, in 2016 stocks are off to their worst start ever. But I wouldn’t call it a crash by any means.
Don’t confuse volatility with risk
You might think that stocks are too risky. Warren Buffett, perhaps the greatest investor of our time, said that people confuse volatility with risk. Let me explain. Stocks are volatile, which means they can rise and fall sharply. So yes, if you are investing for the short to medium term (say up to 5 years), stocks can be risky. You may come in at a high in the market, just before crash. For example, had you invested in the S&P 500 index in October 2007, your stocks would have lost 50% of their value by March of 2009. Now that’s a crash, and it was one of the worst in history. However, by March 2013, stocks had recovered all their losses. Yes, it took several years, but eventually the market reached new highs, and patient investors – even those that invested just before the crash – would have made very healthy returns. And here is where the risk lies. Those people that did not invest in stocks missed out on one of the longest and strongest bull markets in history. The risk is that you may have kept your money in cash and missed the chance for huge gains.
Stocks for the long-run
One of the biggest mistakes I see my clients make is putting their pension assets in low-risk investments. That may be fine if you are within a few years of retirement, but not when you have more than 5-10 years before retirement. That is because over the long-run, stocks have proven to have the highest return of just about any asset class. Every percent in extra return goes a long way. For example, putting $100,000 in an investment that returns an average of 5% over 20 years will leave you with about $265,000. Not too shabby. But when you increase that return by just 1% to 6%, you will have over $320,000 – nearly 21% more! Over the last 20 years, the average annualized return for the S&P 500 was over 8%. That same $100,000 invested over that period would be worth about $482,000, over 50% more than our hypothetical 6% example. That is with only a 2% difference in annual return. Oh, the magic of compound interest.
But keep investments in low-risk assets to meet short-term goals
Again, that is not to say that you should put all your money in stocks. You likely have some short-term goals that you would like to fulfill within the next couple of years – perhaps buying an apartment for yourself or helping your child buy an apartment, helping to support parents or children, having an emergency fund, etc. You may be close to retirement. Allocating the money earmarked for these goals to stocks is indeed risky, as anything can happen in the short-term. Your funds should be allocated properly between low volatility, low-reward investments (cash, short-term bonds, etc.), which should deal with your near-term goals, and high-volatility, high reward investments (stocks), which will fund longer-term goals such as retirement.
Proper allocation is the key
Match up your goals to your assets. This is where a qualified financial planner can help. For example, at my firm, we look at your long term and short-term goals and compare them to your financial situation. We then recommend investment allocations according to these goals, or if necessary, adjusting your goals to be more realistic. Our rule of thumb is to equally allocate to financial markets, real estate and alternative investments in order to reduce volatility.
Remember, the sooner you start planning, the better your chances of meeting your goals!
The information is not intended to be and does not constitute financial advice or any other advice. It is general in nature and not specific to you. Before using this information to make an investment decision, you should seek the advice of a qualified investment advisor and undertake your own due diligence.
Richard Gussow is a Certified Financial Planner, a US CPA, an Investment Marketer licensed with the Israel Securities Authority and a Pension Marketer licensed with the Israeli Ministry of Finance. You can read more about financial planning in Israel at his website: www.richardgussow.com
(03) 970-7070 (052) 806-6690