Tags: Kelly | stocks | bonds | volatility

Strategist: Invest in Stocks Despite Risks

By Michael Kling   |   Wednesday, 04 Sep 2013 08:20 AM

It's certainly a risky environment now. But it's also a good time to invest in stocks, says David Kelly, chief global strategist at J.P. Morgan Funds.

"There are many problems in the economy and in the markets, certainly," Kelly told The New York Times. "But the answer for a long-term investor isn't to avoid risk. It is to be extremely diversified — and to invest in equities. You're likely to do much better that way than if you stay out of the markets."

Military intervention in Syria could send oil prices skyward, the U.S. government may shut down and default due to a deadlock over raising the debt ceiling and financial markets could be disrupted as the Federal Reserve reduces its bond-purchasing stimulus this year.

Editor’s Note:
5 Reasons Stocks Will Collapse . . .

"We could have some very difficult moments," Kelly told The Times. "The one thing you can expect is volatility."

Still, stocks are a better bet that hording cash, he argued. The key is to diversify.

"More balanced global growth and fewer tail risks continue to support the case for global equities relative to fixed income and cash," Kelly wrote in his WorldView 3Q 2013.

Although slowing, Chinese growth will stabilize. Even small improvements in Europe will boost equities, as valuations there are still cheap.

"In Europe there are finally signs that the long nightmare of the debt crisis is drawing to a close," he wrote in the report.

Emerging markets now offer deals for long-term investors. "As investors take a more balanced view on financial markets, the outlook for EM [emerging market] equities looks brighter than for EM debt," Kelly noted.

Investors, he advised, should position their portfolios for rising rates in the United States as unemployment will fall faster than expected and the Fed will reduce its bond purchases on schedule.

Loose monetary policies and extreme caution of individual and institutional investors are the hallmarks of today's environment, he noted.

"These anomalies continue to tilt the odds against those who are still overweight cash and in favor of those invested in balanced portfolios of long-term assets."

While diversification is critical, many investors put too much of their portfolios into stocks, Clifford Asness of AQR Capital Management told Barron's.

"Historically, there have been times when bonds are as risky as stocks, as was the case in the early 1980s," he said. "But the vast preponderance of the time, stocks have both a higher expected return and are considerably more risky."

Editor’s Note: 5 Reasons Stocks Will Collapse . . .

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It's certainly a risky environment now. But it's also a good time to invest in stocks, says David Kelly, chief global strategist at J.P. Morgan Funds.

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