A little bit of calm has returned to what have been choppy waters, however one would not rule out the possibility of more storms ahead. The latest Merrill Lynch survey would suggest fund mangers are well prepared for that eventuality. Cash levels remain high, expectations for global growth and company profits are low. Commodity price hopes also remain low; investors are 5% overweight equities against 21% last month. There is often some speculation that these surveys are answered suggesting where investors think they should be, rather than where they are. Either way it does suggest a much more cautious approach than a few months ago.
There has been a long-term belief that your equity participation should be 100 minus your age. A 50-year-old person should have 50% of his liquid assets in equities. David Levine writing in the weekend edition of the International New York Times argues it should be 100%, whatever your age. As believers in the equity culture, we have sympathy with this view. What everyone, including professionals, struggles with is the volatility that comes with owning just equities.
Mr. Levine’s rational was in his words not only based on historical superiority but also on logic. Mr Levine points out at a high level owning an index fund buys you exposure to many companies in a diverse series of industries. According to Mr. Levine, a million dollars in a US total stock index fund would buy you one twenty millionth of almost the entire US economy.
Economic potential never drops because knowledge (the main source of capita growth) always rises. Human capability keeps rising as average educational and training levels continue to rise. As a consequence, the intrinsic value of your equity investments should rise over time, taken collectively.
Rightly Mr. Levine points out the economy does not grow every quarter, but the recovery from each recession, allows the economy grows to new heights.
Obviously not every company share rises, and some fall never to recover, the point is having a diverse portfolio. The article reminds one of the lines from Mary Poppins, as the little boy causes a run on the bank, when he is being persuaded to invest in stocks. Tuppence wisely invested will compound, you will be part of railways across Africa, dams across the Nile, fleets of Ocean Greyhounds.
Keeping a framed copy of this article on ones desk during the bad days in the market, will remind you why we invest in stocks and help persuade one to see the bad days as opportunities and not to be feared. Perhaps those fund mangers in the survey should have a copy.