Streetwise for Friday, September 8, 2017
Despite the tremendous benefits that are derived from the creation of an equity portfolio, many households continue to remain cool to the idea of stock ownership.
With the Dow Jones Industrial Average near its record high, recent Gallup polling indicates that only about 52 percent of all adults have a stock portfolio. That is the lowest level of stock ownership in Gallup’s 19-year polling history.
In 2007, according to the Gallup organization, approximately 65 percent of all adults were invested in the stock market. That percentage shrank each year from 2008 to 2013 as the effects of the Great Recession took its toll. Confidence in the economy and the stock market shrank, along with the public’s financial means with which to invest.
Today the picture is much brighter. Wall Street has been chalking up new highs for about ten months, in cadence with a growing degree of investor confidence and perhaps with a degree of underlying greed.
However, both confidence and greed are merely side effects. The rising trend in share prices is directly attributable to corporate performance. Translated that means revenues have increased along with earnings and in many cases dividends.
Second-quarter reports show earnings have increased nearly ten percent over 2016. This comes on the heels of a double-digit gain from the first quarter, and some estimates are predicting more double-digit gains for the second half of 2017.
The jobs market continues to improve although low wage growth remains a problem. However, with over 330 million people, plenty of jobs and low inflation, the long-term outlook for the economy remains strong. So where is the problem?
Short-term, it is always the, “crises of the week.” For the moment, it’s North Korea and hurricane Irma. How quickly a day’s events can morph into a disaster of doubt and lack of confidence. Corporate performance is ignored, share prices fall and the prognosticators of doom pounce on the unwary and uninformed
It really does not take much to start a fire, only a little spark. Yet, each pullback, no matter what the cause or degree, is simply another reminder that your favorite stocks are on sale.
If you are among those fortunate enough to have the necessary financial resources with which to invest, what could possibly prevent you from taking advantage of such a situation?
The answer is perceived risk and a lack of confidence. Yes, investing means dealing with projections about the future and the ensuing uncertainty. And while risk can be minimized through a prudent and disciplined investment strategy, it can never be eliminated.
Unfortunately, investors often have a skewed idea of risk. To many it becomes an unrelenting fear of losing hard earned profits or savings. Yet, even during the 2008 debacle, the worst financial crisis of my lifetime, the S&P 500 index was down only 38 percent. Look at where the index is today.
While time is not a panacea that will cure all investment ills, the longer your investment horizon, the greater your probability of reasonable success.
Therefore, we can only conclude that the paramount non-quantifiable risk faced by most investors is mass market hysteria. One of the greatest minds of all time, Sir Isaac Newton, suffered a financial loss in the South Sea Trading Company bubble of 1720. Newton was given to say that he could “calculate the motions of heavenly bodies but not the madness of men.”
The madness referred to by Newton is the combination of fear, greed, and ignorance that so often envelopes the investment world. Yet, an environment of ensuing volatility creates investment opportunities for those willing to implement objective, mathematically based investment strategies.
Note to Readers: I will again be teaching two courses for Ringling College’s Lifelong Learning Academy – Introductory Investment Analysis and Portfolio Management. Classes begin on September 25 and run every Monday for 8 weeks. Call 941-309-5111 or go to www.RCLLA.org.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.