Any Alternative?

IT’S really SCARY & tough TIME to own stocks. But for long-term investors who want their portfolio to clock significant gains, there’s simply no alternative.

People who are currently hiding out in bonds and cash investments. Their plan is to take a plunge when valuations come to levels not seen in a decade, they’ll simple swap into stocks and ride the next bull market to create a significant wealth.

But for the rest of us—the best bet is to hang tough in stocks with the bulk of our long-term investment money. Why? Consider the three major asset classes.

Bonds pay nothing. When you buy a bond or bond fund, the best guide to your likely return is the current yield. 10-year Treasury yielding 6 to7%, If you sell before maturity, you might make more or less than this depending on the Prevailing Interest Rates.

 If you opt for bonds of lower credit quality, you’ll get higher yields and that should translate to higher returns. But there’s also an increased risk of defaults, especially if you dabble in bonds deemed below investment grade.

Cash is trash. The yield on cash investments is more closely tied to inflation. Central Banks across the world is focusing on reviving the economy, which is why all of them have cut short-term interest rates.

That means minimal returns on savings accounts, money market funds and other cash investments. Even when yields on cash / bond investments have been much higher, investors have almost always ended up losing money, once inflation and taxes have taken their toll.

Stocks for the long run. What will stocks return? Well, stocks generally deliver returns similar to GDP growth plus Inflation, if your fund manager is lucky enough then some extra returns as fund manager alpha.

We’re likely to see earnings cut in the short term, as the economic contraction slams corporate profits. We could also see significant dividend / growth cuts. The key is to look beyond this short-term chaos and focus on the decade ahead. And if we do that, I think it’s reasonable to expect something close to that 10% a year investment return.

Convinced? Keep these three points in mind:

• Even if stocks are the best bet for the decade ahead, don’t ignore your risk tolerance and your near-term need for cash.
• Equities may deliver 10% a year, but your return might be far different—if you aren’t diversified. And the best way to get that broad diversification is to invest in Mutual Funds as you can diversify with as little as Rs. 5000.
• If you invest in mutual funds, you’ll enjoy competitive annual investment costs compared to PMS, but once you decide on the Scheme and amount you should give enough time for it to perform. And should not panic if there are some tremors again in the equity market.

Happy Investing

R♥Vi