As stock yields become more attractive than bond yields, is it time to make a flurry and invest in the stock market? If only one had a crystal ball, but all we have is the science of regression analysis, which is not an absolute science predicting the financial markets behaviour.
In the markets, observers wonder what would have happened if the Bulls had bolted hastily and predicted the fall from grace of investing in Bonds to achieve a respectable yield return.
Since the financial crisis of 2008 pushed the world into a recession, central banks from the US to Europe and Japan have cut interest rates to near zero and bought unprecedented amounts of bonds to drag down yields and spur an economic recovery. Cash held by MSCI World companies climbed to $3.4 trillion in 2012, the most in at least seven years, from $2.1 trillion in 2006, according to Bloomberg.
Stocks have paid out less than bonds for much of the past five decades, as equity investors focused on the potential for capital appreciation rather than income. The dividend yield on the MSCI World averaged 2.1% between 1997 and the collapse of Lehman Brothers Holdings Inc. in September 2008, according to Bloomberg data. That compares with the 5% average yield paid by the Bank of America global corporate debt index.
When we step back and take a look at The Really Long Run, we see a much clearer picture. The deep historical perspective as it pertains to the Dividend Yields on Equities vs. Constant Yield on the 10 year Bond may be revealing. The farther backward you can look, the farther forward you are likely to see. Could it be that history has a habit of repeating itself and taking a Kondratieff economic cycle, stock dividend yield may outperform bond yield for the next 50 years!
The Really Long Run
As you can see, bond yields are lower than equity yields for essentially the first time in more than 50 years. Many investors point to this as an obvious signal to buy stocks and sell bonds. But what struck me when I saw this chart was that from 1920 to 1955, equity yields consistently exceeded bond yields, and in some cases by 5%!
For the normal everyday investor it is time to hold stocks directly
There are two basic ways to invest in the stock market: you can buy stocks of individual corporations, or you can buy mutual funds.
For idiosyncratic reasons, there are individuals who like to maintain an active role in equity share selection and that one may have certain stocks they wish to hold. However, direct stock investment requires constant monitoring which can prove both time consuming and stressful.
Leave it to the experts
Mutual funds are run by a professional manager who makes all the investment decisions for the fund. You do not have to spend time researching each company individually. The fund handles all the buying and selling of securities and keeps track of all tax information. The manager generally is required to make investment choices within the scope of the stated objectives of the fund, which are outlined in the prospectus, so you don’t have to worry about choices being made that don’t fit in with your investment strategy.
Buying a mutual fund is an easy way to instantly diversify your investment portfolio. Mutual funds may buy stock in a variety of companies in a particular industry, like technology or the financial sector. Mutual funds allow you to invest in dozens or even hundreds of companies with a single purchase because most funds hold dozens, if not hundreds, of stocks in their portfolios, investing in funds also gives you automatic diversification in this regard, mutual funds tend to be less risky than individual stocks.
Mutual funds can be a prudent way of putting your money into the stock market, as it spreads your risk across a range of companies. It allows you to benefit from the expertise of City professionals, with their access to extensive research and analysis which has been utilised in deciding which funds to use, as well as the comprehensive investment knowledge offered by The Blacktower Group.
The Panacea to fund selection
The Blacktower Group operates in 10 countries and has nearly three decades of experience in investing in mutual funds. Why not tap into this knowledge base and contact us to assess the most appropriate mutual fund to meet your personal objectives? These meetings, non-binding, can be performed in the comfort of your own home or at our offices.
By António Rosa
António Rosa is an International Financial Adviser at Blacktower Financial Management (Int) Limited with offices in Quinta do Lago and Lisbon.
289 355 685 | [email protected]
Blacktower Financial Management (Int) Limited is licensed by the Gibraltar Financial Services Commission Licence No 00805B
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