I'm not really much of an "I told you so" kind of guy. It's rare that I will smugly gloat about being right.
But I am not so sure that I will be able to hold back this time. I'm probably going to have to say "I told you so" when equity markets soar and fixed income investments stall.
Let's be clear here. When I use the word probably, it's not because I have any uncertainty at all in my mind about how this will play out. I am simply referring to whether or not I can restrain myself from reminding all the people that are going to be wrong that I told them that they were wrong well in advance.
You see, right now "everyone" says equities are risky. But bear in mind that in the past "everyone" thought that the world was flat. "Everyone" thought that the sun revolved around the earth. "Everyone" thought that the Titanic was unsinkable.
In their time, almost "everyone" held these ideas to be self-evident and indisputable. But then, of course, and despite these conventional beliefs of the day, there is the world as it actually exists.
What we have at the moment is a nervous herd of investors, convinced that equities are "risky", and about to miss out on one of the great investing opportunities of their lifetime.
We have people who are ridiculously overweight in cash and fixed income investments at the bottom of an interest rate cycle.
We have people shunning investments in the great companies of the world, even though these companies are trading at prices that are dirt cheap.
"Everyone" is fearful of some unprecedented economic collapse, even though corporate earnings are at all-time highs. Corporate balance sheets are beach-body beautiful.
What we have is people confusing the politics of government with the economics of business. And as concerned as some people are about governments, business is good.
The predominant financial crisis for today's milking by the financial media revolves around the shape of the European economy and the 330 million citizens of the Euro zone. And those concerns are real.
Yet much less attention is given to the 3.7 billion people in the emerging markets of China, Brazil, Russia, India, Mexico, South Korea, Indonesia, and Turkey who are entering the middle class, and demanding the goods and services that we take for granted. Goods that the great companies of the world, those same great companies that are trading at dirt cheap prices, are in the business of providing.
Right now the Standard and Poors 500 index is at 1325. I'm going to come back to that number later when I get to talking about planning for retirement. But first let's talk about value. At today's prices, the price/earnings ratio for the S&P is north of 7. That's like the prettiest girl in class inviting you to prom.
The yield on US Treasuries is 1.5%. That means the earnings from stocks is 5 times the yield on bonds. Currently, the dividend yield of stocks is 60 basis points higher than what bonds are paying, with the future capital appreciation of stocks thrown in for free. Guess when the last time was that we had stocks this undervalued and bonds this overvalued? How about never.
Okay, let's talk about retirement. The average age of a couple entering retirement is 62. And a lot of them are looking back at what has happened in the stock markets and are concerned.
But let's talk not about perception, but about what really happened. Let's not talk about the earth being flat, let's talk about how things really are.
Over this couple's lifetime they have seen the Cold War, the Cuban Missile Crisis, the Kennedy Assassination, the OPEC oil crisis, runaway inflation, double digit unemployment, stagflation, soaring government deficits, the terrible recessions of the 1970s and 1980s, Black Monday, the Russian debt default, Y2K, the tech wreck, the September 11 terrorist attacks, the subprime meltdown, real estate prices crumbling, and the Great Recession.
Meanwhile, when this soon-to-be-retired couple was born, the S&P stood at a level of 17. You might recall that I told you earlier that it is currently at 1325. That's right. Despite the litany of obstacles that these guys have seen in their lifetime, the stock market is 77 times higher now.
Here's the thing. If this soon-to-be-retired couple are non-smokers, the odds are that at least one of them will live to age 92. That's a 30 year retirement in a rising-cost world that we need to plan for.
Lots of times people will tell me that they aren't going to live that long. Many of these people will be wrong. Quit thinking about your parents or grandparents life expectancy. Nowadays the statistics are for a non-smoking couple aged 62 at least one of them will see 92. Unless your health is already compromised, failing to plan for a 30 year retirement is foolhardy.
So where was the S&P 30 years ago? I'll tell you. It was at 110. Again, today it is at 1325. From 110 to 1325 over 30 years, and that's not even factoring dividends in to the equation. Now try telling me how bad the last 30 years really was.
Taking a predominantly fixed income retirement strategy into a 30 year retirement in a rising cost world is a losing strategy. Plain and simple. All of history supports this.
And for people who are still in their accumulating years, the opportunity to acquire the great companies of the world at today's dirt cheap prices is a phenomenal opportunity. Don't let this opportunity pass you by. You might not have another like it in your lifetime.
The future is clear; it's only the timing that is uncertain.
And when it's all said and done I probably am going to say I told you so.
The opinions expressed are those of Brad Brain, CFP, R.F.P. CLU, CH.F.C., FCSI. Brad Brain is a Senior Financial Advisor with Manulife Securities Incorporated, in Fort St John, BC. Manulife Securities Incorporated is a Member of the Canadian Investor Protection Fund. Brad Brain can be reached at [email protected] or www.bradbrainfinancial.com.
