Recs

6

Why Stocks Are a Better Bet Than Ever

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

When the markets were flying high, everyone bought stocks. But now that the bear market has taken hold, people are fleeing in droves -- and long-term stock investors will benefit going forward.

For over a year, you've watched your portfolio lose value month after month. Even the most patient investors have started to get restless about their investments and whether they're doing the right thing with their money.

Yet in just a short time, the falling stock market has accomplished something that will potentially boost your returns for years to come. By reasserting the risk portion of the risk-reward trade-off that stocks offer, the downturn has given steadfast investors the chance to earn greater returns down the road than they got when nearly everyone had money in the stock market.

The paradox of risk
In this month's brand-new issue of Rule Your Retirement, Fool retirement expert Robert Brokamp goes into depth about risk and what it means for stock investors. In a conversation with guest commentator and financial author Larry Swedroe, Robert explores what I call the paradox of risk in stocks.

From an investor's perspective, you'd obviously prefer to have all the benefits of higher returns from stocks without any of the downside. That's why the period from 2003 to early 2007 was great -- you enjoyed healthy double-digit returns without suffering any big, lasting declines. All you had to do was invest and wait, and you saw your investments steadily rise in value.

But when other investors see people earning big returns without any apparent risk, they pile in. After all, if stocks really aren't risky, why settle for rock-bottom yields on bonds and bank CDs when you can grow your money much more quickly in the stock market? The resulting extra demand for stocks pushes prices up and reduces the potential for future returns -- because no matter how many buyers there are for a stock, the underlying company can only generate a finite amount of current and future profits.

Responding to the crash
In contrast, when the markets drop dramatically, all those fair-weather investors suddenly realize that stocks weren't the fail-safe opportunity they had hoped for. They're the ones who sell in a panic at market lows, retreating to low-interest bonds and cash investments until they get suckered back into the stock market after the next rally.

But all those sellers do a big favor for disciplined long-term investors. By knocking down prices of shares, they make investing cheap for those with the courage and determination to follow their overall investing strategy even during bear markets. And by scaring off casual traders, they leave more room for true investors to capitalize on great opportunities.

Demanding more for your money
You can see one example of this phenomenon in the earnings yields that investors demand from companies. During the bull market, earnings yields got ridiculously low -- in part because of lofty growth projections, but also due to the high demand for stocks.

Yet if you look at the same companies now, you'll see that their earnings yields have gone up dramatically -- more than you'd expect, even in an economy where future growth seems likely to fall. Take a look at some examples:

Stock

Earnings Yield in March 2007

Current Earnings Yield

NYSE Euronext (NYSE: NYX  )

1.46%

13.04%

Big Lots (NYSE: BIG  )

3.22%

13.79%

eBay (Nasdaq: EBAY  )

2.38%

10.27%

Monster Worldwide (NYSE: MWW  )

2.47%

11.1%

Marvel Entertainment (NYSE: MVL  )

2.43%

8.3%

Coach (NYSE: COH  )

3.04%

14.6%

Viacom (NYSE: VIA-B  )

5.33%

16%

Source: Capital IQ, a division of Standard and Poor's. Current yield as of Feb. 5.

Investors who've come to realize that they can't count on high growth during a recession are now demanding much more proof of actual earnings from companies. With earnings yields at much higher levels than they were two years ago, shareholders can expect to see much greater returns on their investment over the long haul -- especially once the current recession ends and profits begin to grow again.

You're still here
Of course, if you've stuck with your long-term strategy and held stocks through the downturn, you've already paid a high price on your current holdings to get to the point where stocks look incredibly attractive again. But remember: Your retirement relies just as much on the money you'll invest in the months and years to come as it does on what you've already saved. Over the long run, if the panic keeps weak investors away, you'll end up the winner.

If you want to read more of Robert Brokamp's conversation with Larry Swedroe, it's easy: Just join us at Rule Your Retirement. It's a subscription service, but you can get a sneak peek absolutely free just by clicking here.

For more on making the most of retirement, read about:

Fool contributor Dan Caplinger looks forward to the return of positive returns. He doesn't own shares of the companies mentioned in this article. eBay is a Motley Fool Inside Value recommendation. NYSE Euronext is a Motley Fool Rule Breakers selection. Marvel Entertainment, eBay, and Coach are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy roars louder than a bear or a bull.


Read/Post Comments (0) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 826925, ~/Articles/ArticleHandler.aspx, 8/21/2014 12:00:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated Moments ago Sponsored by:
DOW 17,053.98 74.85 0.44%
S&P 500 1,990.69 4.18 0.21%
NASD 4,526.52 0.04 0.00%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/21/2014 11:44 AM
BIG $47.17 Down -0.41 -0.86%
Big Lots CAPS Rating: ***
COH $36.70 Down -0.20 -0.54%
Coach CAPS Rating: ****
EBAY $56.20 Up +2.80 +5.24%
eBay CAPS Rating: ****
MVL.DL $54.08 Down +0.00 +0.00%
Marvel Entertainme… CAPS Rating: ****
NYX.DL $0.00 Down +0.00 +0.00%
NYSE Euronext CAPS Rating: *****
VIA-B.DL $0.00 Down +0.00 +0.00%
Viacom, Inc. CAPS Rating: ***

Advertisement