Hindsight
is 20/20
Does Your Portfolio Have 2020 Vision?
The coming decade is certainly going to be
one of exceptional transformation as innovation is cultivated, emerging
nations develop booming middle classes, and the world shrinks even more with
the omni-presence of the internet and communicative devices. While these
changes can be both exhilarating and daunting one thing is for sure…change
will come. Is your portfolio prepared to take part? Ignoring the companies
that are transforming our lives may not sink a portfolio, but it may
undermine its success.
The technology bubble that popped beginning
in 2000, the liquidity crisis that began in 2007 and 2008/2009’s deep
recession have provided solid proof over the last 10 years that markets do
hold risk. Looking back, some investors might have chosen to avoid equities
during the last decade, but many investors are turning their backs on
equities now—after one of the worst decades the stock market has ever seen.
So it begs the question, are they likely to see a repeat of the decade that
just ended?
Here are 5 reasons why we should be looking
to invest in equities in the years ahead:
History Favors a Return to the Mean
Investors often assume
the worst (or best) will continue—it’s important
to consider long-term
market history.
The World is Getting Smaller (and More
Prosperous)
The world is not only
shrinking, but emerging nations are experiencing
growth of the middle
class and consuming at a rising rate.
Innovation Will Surprise Us...Again
While we should expect
change (and never fully do), the real surprise might
be the pace at which it
occurs.
Quality Companies Are Not Short-Sighted
The market is
continually growing and changing, and while some companies
don’t survive this
evolutionary process, the strongest benefit from it.
Equities Help Protect Purchasing Power
For most investors,
equities need to be a part of their investment mix
to help reduce the
potential risk in their overall portfolio.
While economic disruption can create stock
market chaos, high-quality companies endure and, in fact, often prosper as a
result. Economic downturns are Darwinian in nature—the fragile and
ill-equipped perish while the strong adapt, survive and ultimately flourish.
There are many different qualities of
corporate strength. Strength can come from new ideas or knowledge or
breakthrough technology—the strength of vision. For example, look at
the following companies that began during economic recessions.
Disney – Emerged during the 1923 recession.
Wal-Mart
– Emerged during the 1943 recession.
McDonalds – Emerged during the 1948 recession.
Microsoft
– Emerged during the 1975 recession*
*Source: Company
websites, as of 12/31/08. Recessions as identified by National Bureau of
Economic Research (NBER).
These few examples show that
while some of the “weaker” or less prepared companies may struggle or cease
to exist during a recession, there is potential for new entities to grow and
current ones to expand.
What About Risk?
A company’s financial strength can be
demonstrated by strong balance sheets and strong consistent, predictable
cash flows. Often, evidence of this financial strength takes the form of
company paid dividends.
After the recent market downturn, investors
may be thinking of risk unilaterally. While it’s true that stocks are
volatile and can go down in value, there are other portfolio risks to
consider. The impact of inflation on purchasing power is one risk that has
not had a lot of attention paid to it since the early 1980s. In theory,
stocks should be able to weather inflation better than bonds. That’s because
while a bond’s coupon is fixed, a stock can potentially grow in value if the
products the company sells are rising in price at the rate of inflation.
Take the following chart into account. It
shows the historical 10-year returns following the worst 10-year period
returns since 1926 and has consistently benefited those invested in stocks.
10 Year Returns
■
Worst
■
Subsequent
The decade ahead remains a question mark.
However, looking back on the trends of the market over the past 70 years we
can learn from missed opportunities. And as the saying goes “Hindsight is
always 20/20”.
Additional information on equities is available upon
request.
Talk to
Asset Acceleration Planning today to make sure
your portfolio has 2020 VISION.
*Information from this
article was taken from Franklin Templeton brochure
2020 Vision: The Case for Equities in the Decade Ahead.
