Stocks Are the Only Game in Town

04/09/2009 12:00 pm EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says even after their horrendous performance in 2008, stocks’ long-term performance beats that of all other asset classes.

US stocks surged from their March 9th lows and enjoyed the fastest, steepest rally since 1938. In only 13 trading days, the Nasdaq Composite index jumped 25% and the Dow Jones Industrial Average and the Standard & Poor’s 500 index each rose more than 20%, the traditional definition of a bull market.

However, in the context of the preceding free fall, it feels anything but traditional or normal. After what we’ve been through, and amidst such volatility, it’s a challenge to be confident. People become irrationally pessimistic during downturns.

Yet, we know the economy will not contract indefinitely and already there are glimmers of hope that it is bottoming. Among the Leading Economic Indicators, six of the ten were up in February.

Historically, the stock market has been a fairly reliable leading indicator of the economy. Over the past 60 years, recessions usually ended four or five months after a new bull market began. According to S&P, the S&P 500 has correctly anticipated the end of a recession nine out of ten times.

Sometimes, especially when news is dire and markets move against us, we tend to forget our long-term goals and become preoccupied instead with short-term volatility. Declines in the stock market have scared some investors away from stocks, and most are now wondering if it’s time to get back in.

We recently surveyed our subscribers and found that the severe bear market prompted many to actively alter their portfolio allocations. More than 60% of responders said they had decreased their equity targets over the past year. But 70% anticipate the market will return to new highs in five years or less.

Realistically, regardless of whether the market has bottomed, if you need to grow your portfolio, you need to be in stocks. With cash and Treasury yields so low, most of us simply have to take on some risk in order to make our assets grow. It comes down to simple math of how much you need and how must it grow to keep up with living expenses and inflation.

All investors have limited choices of what to invest in. Some of us may need to use the money we’re investing in three to five years, while others may be investing for a goal 15 to 20 years away. [But] the basic tools we have as investors are the same: stocks, bonds and cash. And the long-term returns of stocks are nearly double those of bonds or cash, even after the horrible declines of 2008.

This is not to say that we’ve reached the bottom of the current market cycle, but historically, it has been profitable to buy stocks when the market is down.

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