Wednesday, October 07, 2009

Why Stocks Still Make Sense to Me

Even with the recent decline in the stock market, I believe that stocks are a great investment. Here are the reasons:

  • U.S. and global economies are still resilient. Although the financial crisis was devastating, the economies didn't go into depression and are now in (slow) recovery. China, India and Brazil are still growing. Other emerging markets are also still strong. Also, I believe the U.S. economy will be strong enough to rebound from the current recession.

  • Historical long term mean returns are the best benchmark. I am often guilty of extrapolating recent investment returns into the future. In October, 2007, I thought the market would keep going up at least 8% a year. In March, 2009, it seemed the market would only go down and I stopped buying stocks. Statistically, a good strategy is to assume that the long term returns will be close to the mean.

  • Haven't found better alternatives. We already have enough fixed income investments and own a home. With interest rates being low and real estate being illiquid, I don't want to add more funds into these areas. Since I feel commodities are very speculative, I am reluctant, at this time, to transfer significant funds from stocks into these investments.
  • Although the experts keep predicting a 10% pull back, the stock market has not corrected since the March, 2009 bottom. It appears that traders buying on every dip, which may be preventing a significant correction. We started adding funds back into stocks in September, 2009. For now, I plan to increase the amount of our equity investments by 10-20% over the next six months.

    For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

    This is not financial or investment advice. Please consult a professional advisor.

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