We never know when to buy stocks. The future is always murky. There are always plenty of things to worry about. And yet we know that over the long term --- 10 – 15 – 20 years --- stocks have almost always done very well. Over the long term, there are few other ways to keep with up with inflation and to accumulate any wealth.
The public attitude toward stocks has soured recently because stocks have not done well. Since the recent high in late April, the broad U.S. stock market is down 14 percent with much of that coming in several spectacular and scary drops. The most recent decade was the worst for the stock market in at least 100 years – worse even than during the Great Depression of the 1930s.
The world economy has suffered through a prolonged global downturn; the worst since the 1973-74 global recession and possibly since the 1930s. Recently Nobel Laureate Paul Krugman, in his column in the New York Times, predicted that we may be in the early stages of the third prolonged global Depression of the last 150 years.
Should we be depressed? Should we avoid stocks? Should we put our investment dollars under the mattress, buy gold, party because the end is near?
Such gloom may be warranted but we like to look on the bright side. We would agree that the global economy was on the precipice in September 2008. It’s possible that we could have a serious relapse into recession but the odds favor a subdued but durable recovery.
Based on U.S. history and lessons from around the world, it’s likely that high unemployment will persist for at least several years. Even so, the U.S. recovery seems to be well established and likely to persist. The sluggish nature of the recovery, perversely, is likely to extend its duration as happened during the 1990s. But lacking a crystal ball, we cannot discount a second dip recession or some other massive economic mishap.
Why then are we so sanguine about the long-term prospects for stocks? For twelve years, the Dow Jones Industrial Average has hovered around 10,000. In inflation adjusted terms, the Dow has suffered a serious decline. By historical standards this is a long time for the stock market to stagnate. Meanwhile, Gross Domestic Product – the source of profits and ultimately the bedrock of stock valuation – has climbed by more than 60 percent.
While we don’t know when the stock market will break out of its funk, we are confident that it will eventually. Only long-term investors, those with horizons of five years or more, should normally participate in the stock market and over the long-term we see little to suggest that stocks will depart from their historic upward trend. If we are eventually to return to that trend, the very bad period that we’ve been stuck in for so long, actually augurs well for the future.
We consider a key to participating relatively safely in any stock market uptrend is to craft a broadly diversified global portfolio, which is a mainstay or our investment approach.