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The Cult of Equities is Dying – Again?

Over the month of August you likely saw headlines about the European debt crisis and economic slowdown, China’s weakening growth, feeble corporate earnings outlooks, and hiring in the U.S. that remains too weak to help the economy.

Bill Gross, the celebrated bond manager at PIMCO, even came out and said at the beginning of the month that stocks can’t continue to perform as well in the future as they have over the past 100 years and that “the cult of equities is dying.”

However, despite all of these negative news items and predictions, world stock markets were up for the month.  U.S. equities gained 2.5% and international equities were up 2.2%. 

Investors are constantly challenged by negative news stories and doomsday predictions about equities.  It is difficult to be able to look past the very short term and remain focused on the broader picture.  However, by staying disciplined to an appropriate investment strategy and rebalancing investments to their targets, investors have consistently been proven to avoid financial pitfalls.  The question remains if they will continue to benefit.

Looking back at Bill Gross’ prediction on equity markets it might sound familiar.  He made two similar pronouncements; once at the end of 2002 and again in February of 2009.  Both times, if investors did the exact opposite of what he was suggesting, they would have had terrific performance.  This is because when he made these predictions stock prices were at the very bottom of market cycles.  Again, after his comments were made at the beginning of August, stocks hit highs last seen in 2008.

A similar refrain was echoed in a 1979 Businessweek cover story.  The article stated that future conditions were poor for stocks as inflation would eat away at any return potential.  They believed it wasn’t worth it for investors to have their money in equities.  Of course since the article was written stocks have had an annualized real return of 7.6%.  Equities have proven prognosticators wrong time and time again.

We don’t know what the future holds for equities and we have no doubt that there will be periods of severe losses.  However, over longer periods of time a diversified portfolio of equities has performed very well and provided returns that have strongly outpaced inflation.  We have every reason to expect this to continue.  By staying disciplined to your investment allocation and tuning out the day to day proclamations of pundits, one can resist the emotional temptation to tinker with your investment approach.  By staying the course an investor in a well diversified portfolio stands a much greater chance of reaching their investment goals than those who let emotions and headlines guide their decisions.

Index Performance                                   August     YTD    Trailing 1 Yr       

US Stock (Russell 3000)                                   2.50%      13.15%        17.03%        
Foreign Stock (FTSE AW ex US)                      2.15%       6.95%        -1.62%        
Total US Bond Mkt. (BarCap Aggregate)        0.07%       3.85%         5.78%         
Short US Gov. Bonds (BarCap Gov 1-5 Yr)     0.05%       0.90%        1.19%
Municipal Bonds (BarCap 1-10yr Muni)         -0.01%       2.73%         4.76%
Cash (ML 3Month T-Bill)                                 0.01%       0.06%         0.06%