The Dow Jones Industrial Average gained 21 percent during the first 10 months of this year, but most investors will be disappointed when they open their account statements because their gains are much smaller than that, according to Seth J. Masters, chief investment officer at Bernstein Global Wealth Management.
Masters estimates most U.S. investors’ portfolio gains through October range between 5 percent and 16 percent.
Why the big disparity between their returns and Dow’s remarkable performance so far in 2013?
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Blame it on bonds, foreign markets and cash.
“With interest rates rising, bond markets have returned little, if anything, this year. As a result, no balanced account could come close to matching the results of U.S. stocks this year.”
In addition, many investors have exposure to foreign stocks for diversification purposes. But Masters noted emerging market stocks have returned only 0.3 percent this year.
“Also, many investors have kept their portfolios skewed to bonds and cash over the past five years because they were traumatized by the market swoon in 2008, and prized safety at any price — even if they needed growth to fund their retirement or other goals.”
Portfolios heavy with cash and bonds are actually risky if the result is that investors will not have enough capital to meet their spending needs in the future, Masters said.
Masters said his firm believes the stock market is fairly valued compared to bonds. “For those who need portfolio growth, it isn’t too late to get back into stocks,” he predicted.
At Nuveen Asset Management, chief equity strategist Bob Doll agreed there still appears to be some gas in the stock market’s tank.
“Increased risk tolerance and continued Fed monetary easing imply that valuations are likely to remain high and may expand,” he wrote in his weekly commentary for investors.
Doll said corporate earnings and revenues need to show real growth in 2014 in order to keep stocks aloft, because profit margins have expanded about as far as they can.
He said a small pullback in the market soon would not be surprising.
“Although equities seem somewhat overbought in the near term, we would expect any consolidation to resemble recent short and shallow changes that have lasted a few weeks to several months, with roughly 3 percent – 7 percent in magnitude.”
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