By Anthony Jerdine February 11, 2016
For a buy-and-hold investor, U.S. stocks are still the place to be in 2016. However, proper portfolio diversification also includes allocating a portion of your portfolio to other securities, such as Treasurys, corporate bonds and international stocks.
Over the long term, the U.S. stock market has always risen. Downturns and bear markets are painful when they happen; sometimes, it looks like things are never going to turn around. Since bad news sells papers, the media compound the issue by projecting financial Armageddon every chance they get.
Always remember two things: The U.S. stock market has recovered from every downturn to surpass previous highs, and the investors who buy when the market is down do better in the long run than those who sit out or, worse, sell when things get bad.
The Case for U.S. Stocks
2016 has not been strong out of the gate for U.S. stocks. In January alone, the Dow dropped by over 1,500 points. The talking heads on cable news are already rolling out their doom and gloom predictions. Get ready for another 2008, the prognosticators say.
Suspend your disbelief and assume that 2016 does turn into another 2008, which would be an absolute worst-case scenario for U.S. stocks. Even if the worst comes to pass, that does not mean it is a wise move to abandon U.S. stocks.
Consider a hypothetical investor who bailed after the Lehman Brothers collapse in September 2008. At that point, the Dow had dropped from an all-time high above 14,000 to below 9,500. The experts were screaming to sell, as they predicted the entire financial system was on the brink of collapse. Many investors listened.
By March 2009, a hypothetical investor who got out the previous September was feeling pretty good about his decision, even though he had sold at a 30% loss from the market’s 2007 high. The Dow was now below 7,000. The pundits were calling for bigger losses, down to 2,500 or lower.
Sufficiently spooked, the investor stayed on the sideline. However, the market began to rebound in April 2009. Six months later, the Dow was back over 10,000. Analysts called it a dead cat bounce, and the investor held onto his money. Two years into the recovery, in March 2011, with the Dow above 12,500, the investor finally jumped back into the market. His shares were 31% more expensive than he sold them for in 2008, and he missed out on a spectacular bull run.
The moral of the story is that you should never let a month or two of bad news – even terrible news – scare you away from U.S. stocks. Over the long run, they have always been a fantastic investment. Keep your money in U.S. stocks and ride out the downturn; in 10 years, you are not going to remember the tumultuous start to 2016.
Diversification Is Good
While U.S. stocks are the place to be, that does not mean they are the only place to be. Because other types of securities do not move in lockstep with U.S. stocks, diversification allows your portfolio to gain even during down periods for the domestic stock market.
Treasury bonds, for example, often perform well when the U.S. stock market is down. This was the case during the late 1970s and early 1980s. Overseas stocks should receive allocation in a diversified portfolio. If you are young and growth-oriented and can withstand a higher level of risk for the potential of greater reward, consider devoting a portion of your portfolio to emerging market stocks.
The U.S. stock market is never a bad place to be for a long-term investor. Even the Great Depression was not capable of keeping stocks down forever. When bad news seems incessant, keep the long-term picture in mind, and try to not stress out over short-term volatility.
Are U.S. Stocks Still the Place To Be in 2016?