Is This the Decade for Stocks?

08/06/2012 11:00 am EST

Focus: STOCKS

Despite the poor performance of stocks over the past ten years, the long-term record is why The Prudent Speculator's John Buckingham has firm ideas on where one should be investing.

Why are stocks better than fixed income? We're here with John Buckingham, who is going to explain to us why that is the case.

Well, I think for investors' long-term assets-those that are earmarked for three to five years or longer-equities deserve a significant place in that portion of the allocation.

Why is that? Well, historically, stocks have delivered the best long-term returns-anywhere from 10% to 12% per annum if you go back to the 1920s. The fact that stocks have not done all that well since 2000 makes the odds of outperformance as we go into the next ten years even higher.

But you don't necessarily need 10% to 12% these days, because the alternatives that you have out there in the investment world-fixed income or money markets or things like that-are just not yielding anything. That's the true beauty these days of equities, that you can get a dividend yield, build a nice blue-chip portfolio.

And we do have stocks that we like. Names like Lockheed Martin (LMT), yielding almost 5%. Pepsi (PEP), yielding over 3%. Intel (INTC), yielding over 3%. Waste Management (WM), yielding over 4%. Hasbro (HAS) yielding over 4%. All these companies are trading at inexpensive valuations, in addition to having dividend income.

We're always after capital appreciation plus income, so it's a total return package that we're looking for. But if I can get the income stream that is going to give me much more than I'm going to get off my fixed-income investments, generally speaking, or my Treasuries, and I can combine that with the long-term capital appreciation potential-keeping up with or exceeding inflation-I think that's a winning combination.

Where I think people are really going wrong these days is they're shoveling money into a ten-year Treasury under a 2% yield. Well, inflation has historically averaged 3%...and maybe we'll only average 2% or 2.25% going forward. But what does that mean for the investor? It means he has earned zero real return after ten years, assuming he holds to maturity; and if he/she doesn't hold to maturity, then you have the risk of having to sell that instrument at an unfavorable time.

And believe it or not, the ten-year Treasury has moved up in price and down in price, and the yields have ranged from 1.4% on the low end here recently to 2.25% or so on the upper end. You lose money when rates move like that if you're forced to sell.

So I really think that equities deserve that place, because you're going to be able to keep up with inflation, if not beat inflation, and you're going to have a very nice income stream along the way investing in some of America's and the world's greatest companies. I mentioned some of the names I like.

We don't limit ourselves only to US companies. They have to trade in the US...but we do like some foreign companies as well that have ADRs here. Names like Total (TOT), the French energy company.

There are many other stocks that look very attractive out there, and so I would say to an investor today that you really want to understand your time horizon for various aspects of your portfolio. So many people get caught up in the whole thing and say "Uh-oh, I can't lose this; I can't lose that." but you really may not have a need for that cash for 20 years for a portion of the cash.

So segregate it out and then leave that money alone, so to speak-don't watch CNBC unless you have to-and don't look at your smartphone 27 times every minute to see, you know-gee, the Dow is up seven points and now it's up 7.2 points and now it's up 6.8 points.

Smartphones and the media and the instant access to information is something that just doesn't help the long-term oriented investor, because then they tend to really focus on their short-term movements. And half the time, we don't know why the market moved up or down on a given day. We figure it out after it's moved, and then point to that reason.

Right; and you have high-frequency trading and all these other things. And you can't assimilate all the information if you're a long-term investor, because all that information isn't really necessary to your core values. And they feel the flight to safety into bonds, but it's an illusion that interest rates are going to stay where they are and inflation is going to stay where it is, and if you're not prepared for that, then there's a great danger.

No question in the short run. You know, what happens in Europe...and we have an election coming up and a lot of people aren't happy with either candidate. So there are a lot of potential minefields out there, but that's why I say pay attention to the portion of your portfolio that is geared for long-term investing and think about what makes the most sense.

Do you want to invest in Intel or Pepsi or Waste Management or Hasbro or Lockheed or names that are likely to continue to grow earnings and continue to grow their dividends? Would you rather own those companies for the long term? Or would you rather be getting a negative real return on a US Treasury?

I think I know the answer to that.

I think the answer is obvious, but you have to change your thinking which is, uh-oh, stocks might go down 10% because we're going to sell in May and go away or something like that.

You really need to focus that portion of your portfolio that is long-term on what makes the most sense for someone with a long time horizon. Today, I really think equities make a lot of sense for them.

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