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Tags: stocks | best | small | investors

Stocks Remain Best Choice for Small Investors

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Peter Morici By Tuesday, 06 November 2018 08:33 AM Current | Bio | Archive

October produced unnerving turbulence for equity investors. Now, the Democrats, likely flexing more muscle on Capitol Hill, bring new uncertainties.

But for the ordinary investor, equities remain the most essential tool for accomplishing long-term financial goals like a secure retirement.

In recent years, big-tech stocks have accounted for the lion's share of stock gains but virtually every hot tech company faces new challenges. Facebook and must bear added costs to ensure user privacy, police content for foreign interference, and cope with additional government oversight.

Along with Google, those social media enterprises' basic business model - mining user data to sell ads and information to market analytic firms - will require more self-discipline or encounter new regulation.

Netflix is bracing for the publication of a Wall Street Journal investigation into its workplace practices. Amazon and Google have attracted antitrust scrutiny for their treatment of business partners. Apple is casting about for new businesses, because it doesn't have any hot new gadgets and iPhones are approaching market saturation.

Stock valuations are a bit below the 25-year average.

Even with the lofty valuations of glamour tech stocks, the trailing 12-month price-earnings ratio for the S&P 500, which accounts for approximately 80% of publicly traded U.S. equities, is about 22 and below its 25-year average of 25.

Overall, with the economy continuing to grow at about 3% a year in real terms and 5% to 6% nominally, the fundamentals point up for equities, but progress will depend on more lift in the valuations of traditional companies.

Consumer products like Unilever and Kimberly-Clark, after a nadir, are exercising pricing power, and much overlooked auto makers have been marking gains, as sales volumes level, by increasing technology content and pushing up average vehicle prices.

Of course, uncertainty abounds about the future of the economic recovery.

J.P. Morgan made headlines recently by placing the chance of a recession sometime in the next two years at more than 60%. And the International Monetary Fund has marked down its forecasts for global growth from 3.9% to 3.7%, blaming trade disputes, rising interest rates and the like.

The facts are large businesses are allocating significant shares of their tax-cut windfalls to capital expenditures and employee training, and that should boost productivity to keep the economy going even with labor shortages. And most developing-country businesses beyond China are hardly affected by U.S. tariffs and borrow too much when U.S. interest rates are low - they don't take into adequate account investment activity of similar businesses in other emerging economies and overcapacity results. And too much money is siphoned off by inept and corrupt government bureaucracies.

The Fed will continue raising the federal funds rate into next year but if it stops at 3%, the U.S. recovery should continue quite a bit longer.

For most folks, stocks and high-quality bonds, CDs and similar fixed-income instruments are the most reasonable places to save for retirement and other long-term goals. Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries 2 to 1, and no credible argument has been offered why that should change over the coming decades.

Picking the next Apple or Amazon or timing the market is virtually impossible for small investors. Ordinary folks should put most of the money they won't need over the next 10 years for emergencies or big expenses like college tuition, a new roof or a down payment on a house into a low-cost S&P 500 index fund, such as those offered by Vanguard or USAA - or a similarly broad-based, low-cost portfolio.

Perhaps place 20% in an index fund for global equities, excluding U.S. equities - sometimes U.S. stocks race ahead of sound companies abroad and other times foreign stocks do better.

Then as retirement approaches, gradually move about half of that money into fixed-income vehicles with maturities of less than three and up to five years. The length of the ladder will depend on annual cash needs, as retirees don't want to be selling stocks when values are down.

Essentially, that is what Angela and I did, and approaching 70, we work only as much as we like.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist. He tweets @pmorici1

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For the ordinary investor, equities remain the most essential tool for accomplishing long-term financial goals like a secure retirement.
stocks, best, small, investors
Tuesday, 06 November 2018 08:33 AM
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