Will stocks always go up?
With stocks down 40-50% this year, many in the financial press are saying that this is a good opportunity to purchase at a discount. They point to evidence that stocks have always gone up in the long run, and that you should continue to invest.
Financial experts have also said that real estate always goes up, and that there has never been a national downturn in real estate in history. But we are now witnessing a new era in real estate that the financial experts never expected. So is it possible that the experts are wrong about “stocks for the long run?”
There are two very big cases against stocks in the coming years. First are interest rates which are at historic lows. As interest rates go up returns on stocks will likely fall. The other factor, and I think this is a big one, is the aging population.
Over the past 20 years the stock market has been the de-facto vehicle for retirement funding. This was great for stocks as people contributed to their 401(k)s and IRAs, driving up valuations. But soon the first wave of baby boomers will begin to retire, selling their stock funds for living expenses, and the cycle will begin to work in reverse creating downward pressure on prices.
I’m not sure how this will affect stocks as a whole, or it will even affect them at all. I am not saying that you should pull all of your money out of stocks now and use only CD’s. I am saying I don’t agree with the idea of investing 100% of your money in stocks because you’re young and have x# of years until retirement.
Here is a portfolio recommendation from David Swensen, the former investment manager of the Yale endowment portfolio. The author of the post also recommends ETF’s to gain exposure to those asset classes. Notice that there is only a 30% exposure to domestic stocks, and only a 50% exposure to stocks overall. The rest of the portfolio is in bonds and REITs.
While REITs are definitely no less risky than stocks, they do offer another way to diversify, and give you exposure to the real estate market if it turns around. Investing in bonds offers less risky returns for your portfolio.
This post is in no way a recommendation on how to balance your portfolio, it’s simply me organizing my thoughts on asset allocation and the “stocks for the long run” hypothesis. If anyone has any thoughts on the matter I would love to hear them in the comments.
