More on Less Americans with Stock

The fact that fewer people own stock is not a bad thing, at all — because, in my mind, most individual investors are too heavily weighted in stock. This causes a lot of stress and financial difficulty and, unfortunately, is one of the easiest investing mistakes to make.

Investing is relatively simple, but without competent professional help most families will start making mistakes, often subconsciously. A few seemingly small errors often add up to a serious drag on long term investment results. The heavier a family is in stocks, the more chances there are for emotion to take over and mistakes to be made. Plus, the consequences of mistakes are amplified with a more volatile portfolio.

As I wrote about yesterdayThe New York Times recently wrote about a Gallup survey that found the percentage of American families owning some form of stock is declining, and is below where it was in 1998.  I am not too worried about this.  In my experience, most families own more stocks than their comfort level allows.

Stocks’ risky trajectory

It is important to point out (again) that stocks are very, very risky. They commonly have 10 year periods with flat returns – sometimes 20 years when you factor in inflation. They have plenty of time periods where they lose close to 50% of their value. When returns do come, they come fast and in very short periods of time. If you miss one of these small windows, you lose out on all upside of stocks.

Not too many decades ago, stocks were considered the exclusive province of the wealthy. The affluent could afford dabbling in stocks. They had superfluous money to put at risk. Most of the middle class never owned or even considered owning stocks. The few times the masses were drawn into stocks, such as the South Sea Bubble and the Roaring 20’s, it generally ended in disaster.

Nowadays, this equation has been flipped on its head. The affluent often have portfolios heavily weighted bonds and other low risk vehicles, while the middle class keeps pumping their spare money into heavily stock weighted portfolios.

Most families would be happier with less stocks

When I help families choose investment portfolios, I show them a lot of historical examples. I often see their attention immediately gravitate to the chart below. Everyone says, “I want that one!”

20 stock graph

This is a chart of a hypothetical portfolio since 1990. The value has more than quintupled over the last 23 years.  A $200,000 investment in 1990 would be $1,040,000 today. That translates into an annualized return of 7.35%. But the families are most drawn to the consistency of the graph. It has such a smooth upward trend, with just a few tiny snags during crashes like 2002 and 2008.  What is this portfolio! Is it some sort of long-short hedging strategy? Is it some sort of high income private equity fund? The answer is…….drum-roll…..a portfolio composed of 20% US Total Stock Market Index and 80% US 5 Year Treasury Notes Index.

That’s it.  Just 20% stock and the rest in treasury notes. When I help families invest, we often decided to have much more risk than this. I am in no way advocating everyone jump into a 20% stock portfolio. But my point is that most investors own more stock than they should. Most families would have been a lot happier with this level of volatility — and this performance — over the last 20 years than with whatever else it was they happened to have in their portfolio.

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