WEALTH CREATION?
Investing in stocks for the long term has proven to be one of the best ways to increase your wealth and with can come financial security. Some stocks and their underlying companies have disappeared over the last decades. Enron, Lehman Brothers, Blockbusters, World Com, Eastern Airlines to name a few. General Motors actually went out of business, except for the generosity of a government bailout. Picking the losers and winners has always been a tough job, and no one has proven to be good at it all the time.
It is not easy to watch your stock market investments go down in price month after month. Multiyear downturns happen. Anyone remember their March 2009 stock account statement? It was a throw your hands up and shrug your shoulders moment. The Dow fell to 6,500 on March 9, 2009, which turned out to be a 13 year low. Just because I am a professional stock advisor, does not mean it is any easier for me than anyone else to watch my stock market investments take that big a hit.
The fact is you must, borrowing from Nick Saban, “Trust the Process”. If you do, history has proven that you will be rewarded with a better overall return than if you took zero risk and put money into FDIC backed CD’s.
The fact is, we must have big winners in the stock world to keep our wealth creation going in the right direction. As of July, of this year 35% of the S&P 500 index total worth is made up of 7 stocks (Mag 7). It has always been that way to a certain extent. To keep stock averages going up we need big winners. The Mag 7 reported a 52% increase in profits in the first quarter of this year. That compares to a decline of 8.7% for the other 493 companies. Nvidia, Tesla, Alphabet, Facebook, Apple, Amazon, Microsoft and their collective AI hopes and plans have spurred stock market advances. Sure, we want all the other companies to do great too and that seems to be happening as this rally is broadening out to include smaller companies’ stocks as well.
Small cap stock hopes seem to be correlated with interest rate cuts that may or may not be coming. Going back 100 years or more, small cap stocks have on average returned larger returns than large cap stocks. At least that was true until the last 30 years, when mega cap high tech stocks have really dominated and given investors outsize returns.
Where does it go from here? If anyone has a crystal ball that works, let me know. Wealth creation and destruction will continue to happen and despite those stomach-churning downturns and sell offs Long Term stock investing works.
As always, expect the unexpected. Things will change.
Thanks, Andy McClung CFP®
Karen Langly Wall Street Journal; Dan Burrows Kiplinger.com; Wikipedia; foolwealth.com;
2024 Market Results
DOW: 7.7%
S&P 500: 14.7%
Nasdaq Composite: 15.85%
Russell 2000: 10%
DOW Global: 9.2%
Source Wall Street Journal 7/29/2024