Patience Pays Off for Investors
Welcome to the 1970s. The decade that gave us disco and Archie Bunker was also a time of economic stagnation, widespread dissatisfaction with government and corporate America, and a stock market that just couldn't seem to get unstuck. Oh, sure, it's 40 years later. But just like bell-bottoms and bare midriffs, the investment malaise of the '70s appears to have made a comeback. Then, as now, the stock market staged multiple advances. But the moment investors got comfortable with the notion of earning a reasonable return, some sort of crisis upended the rally. So the same question that was asked so frequently then is again on the lips of stock market investors: Is it time to bail?
It would be great to provide a simple yes-or-no answer. And yet it's impossible without asking another question first: Why do you own stocks?
The long view. If you're investing for a short-term goal -- anything that requires cash within the next five years -- putting your money in stocks is inordinately risky. That's because stocks, by their nature, are volatile. The faintest whiff of economic smoke and market pundits yell "Fire!" and head for the exits. If your dreams rest on short-term stock market performance, they can quickly go up in flames. But if you're investing for a long-term goal, you may want to fall back on ancient wisdom embodied in the proverb "This too shall pass."
I say this, of course, as much for me as for you. Like many others, I worry about the "fiscal cliff," not to mention the burgeoning federal budget deficit, which could have disastrous consequences down the road.
During the stock market's post–Election Day swoon, I, like many other investors, thought about selling my stocks. In my mind flashed the dangers of the fiscal cliff, which refers to the drastic spending cuts and tax hikes that will be triggered if our leaders can't reach a compromise to cut the deficit. Permitting the government to fall off the cliff would likely precipitate a recession. But the partisan divide is so wide that it is conceivable that legislators and the White House really could allow the nation to fall into an economic abyss.
Yet the fiscal cliff may be the least of today's worries, because it can be averted. The mushrooming federal deficit, on the other hand, presents real and substantial concerns that are not easily solved. You can cut the deficit through economic growth, which boosts tax revenue, or by reducing spending or raising taxes -- or by some combination of all three. Growing our way out of the deficit is looking unlikely at the moment, and the other two options have important consequences. Reducing government spending -- even just reducing the growth of spending -- means less money will be poured into the economy. Raising taxes takes money out of people's pockets and often boosts tax "avoidance" -- not necessarily cheating, but putting more money into, say, tax-free municipal bonds rather than stocks. Thus, tax hikes often prove less effective at raising revenue than their proponents would suggest.
So, then, why am I not selling my stocks? Partly because I expect our leaders to stop bickering and reach a compromise for the good of the country (they may have already done so by the time you read this).
But thanks to Morningstar's Ibbotson unit, we also have 86 years of stock market history to turn to for solace. What does it tell us? The worst 15-year periods for stocks ended in the early 1940s and the early 1980s. Those miserable stretches encompassed the Great Depression and the great malaise of the '70s. But the bleak times were followed by the rewarding 1950s and early '60s, and the super-lucrative '80s and '90s.
In other words, I believe I will be rewarded for being patient. If you have decades on your side, you can wait out the market's frequent spills. Just don't expect a smooth ride.
Kathy Kristof is a contributing editor to Kiplinger's Personal Finance and author of the book Investing 101. You can see her portfolio at kiplinger.com/links/practicalportfolio.