The great thing about Google’s business model is not how they make money but how much their data generation reveals about the world. Dow 14000, for instance.
For instance, if you take a look at Google Trends, their page on search statistics, it’s not hard to see people that are getting interested in stocks again. A search for the phrase Dow 14000 was hugely popular in July 2007.
You see the phrase come up again and again in the intervening years, hitting peaks in October 2008 (October is a touchy month in market history), then March 2009 (the recent bottom) and then not again in a big way until February 2012, when the industrials were flirting with 13,000 once gain.
Needless to say, the hype-o-meter has taken off, thanks to the index’s recent performance.
That has unleashed a wave of media stories, naturally, about small investors and whether they will dip a toe back into the equities markets.
Leaving aside for a moment the fact that index and exchange-traded funds have been raking in assets once housed in active mutual funds, there is a question worth posing: “Are stocks safe again?’
Of course stocks aren’t “safe.” They never were and never will be. That’s what risk is all about. If you wanted an investment that paid a return at virtually zero risk, you would buy an insured bank CD or put your money in a savings account.
The next step up the ladder of relative safety is bonds, particularly U.S. Treasury bonds.
Yet the bond market implies all kinds of risks most small investors ignore, such as credit risk (that a government or corporation won’t pay you back) and interest rate risk (that you won’t be able to sell a long-dated bond because newer bonds pay more interest).
And of course there is the risk, shared by any so-called “safe” investment, that your return will fall behind inflation itself.
But the bottom line is more simple than that: Bonds are a type of loan for which you can expect the return of your principal in time. Stocks are not.
Unless, apparently, you are Jack Bogle. The founder of The Vanguard Group made an interesting case in an interview with CNBC.
Put simply, he said, stocks over the coming decade will be “income generators” for investors.
What does that mean? One way to look at it would be to assume that he means dividends paid out to shareholders. And it is true that dividends add to total return, which is the combination of dividend income realized and appreciation (once realized) from owning equities.
Another, possibly more accurate way to look at it is that bonds, long the income engines of a long-term portfolio, simply won’t play the same role they did in the past.
Bogle, for instance, sees stocks doubling over 10 years but bonds returning just 35%.
Bogle’s long-term view on stocks always interests us. He is, after all, the father of passive, long-term index investing.
He’s also been a longtime proponent of asset allocation, that is, owning a mix of asset class to ensure the best return for the risk one assumes. For him, that means both stocks and bonds.
True diversification and Dow 14000
To that we would add a measure of hard assets, such as commodities, and a mixture of stocks and bonds that includes foreign and emerging country shares, small-cap stocks for their added oomph and even real estate.
The key to risk-adjusted investing is to buy diversified index funds and ETFs but also to own the correct mix of asset classes, and to rebalance them on occasion.
A well-designed portfolio will weather the markets, Dow 14,000 or not, and provide you with the tools you need to compound your wealth over time with the least risk possible.