So it’s nice when groundbreaking research endorses our approach.
A huge new Morningstar research project looked at long-term investment returns in 20 different countries going all the way back to 1900. Their findings?
Historically, over the long-term, stocks have in fact been the safest asset class for investors in terms of keeping up with inflation and helping them to meet their long-term goals.
“What we found was that the longer you hold stocks, the safer they become. People think of cash as being a safer investment for longer time periods (however) stocks actually were a safer investment for someone investing for maybe 10 or 20 years versus cash or bonds,” said David Blanchett, head of retirement research for Morningstar Investment Management.
So how do we put this new research to work in your portfolio?
Think Long-Term. The key here is the long-term time horizon. Stocks are not appropriate if you need your money to pay your taxes next April, or buy a house in two years. To benefit from stocks, you need to be planning on at least a five- to ten-year holding period, or longer. Otherwise, you run the risk of selling in a downturn before you’ve been able to capture stocks’ superior long-term gains.
Beware The Drawdown. Retirees or other investors in “drawdown” mode – meaning they are taking periodic distributions from their portfolios to meet their spending needs – absolutely need to hold bonds and other low-volatility investments in their portfolios, to balance out their more volatile stock holdings. Just because stocks may be less risky over the long-term doesn’t mean they won’t be volatile over the short-term. If you need cash, and the market is down, you can make withdrawals from the more stable bond holdings.
Know thyself. Holding stocks long-term may make for great returns, but it doesn’t work for all people. If you couldn’t stomach the extreme volatility of 2008, or sold stocks in a panic and sat it out in cash, then a stock-heavy portfolio is not for you. You can still benefit from stocks’ long-term growth potential, but need a more balanced portfolio emphasizing bonds and other lower volatility choices. Buying too many stocks and selling out when the market is down is counter-productive. We can still build a great portfolio for you, but it needs to be well-suited to your more moderate risk tolerance.
The Final Word. We’ve all learned a lot over the last couple of decades, and today’s market environment poses new challenges and opportunities. The main challenge is how to make your money last as long as possible, given what could be a new era of reduced asset returns, where we’ll have to work harder to save enough – and earn enough – to ensure a comfortable future. Don’t fear the stock market. It’s still the biggest engine for growth that we have, and when properly harnessed, can fuel your portfolio for decades to come.