Investors nowadays are confronted by difficult choices. Unfortunately, there are no easy answers readily available.
Bonds usually are considered stodgy and do not provide significant profit or opportunity for gains. However, contrary to expert opinion historically they returned better than nine per cent over the last twenty years. With yields so low that have entailed strong bond prices, they now are at a point where further gains are unlikely. It should be noted that top-quality bonds now provide yields of only around two percent.
A return to inflation is inevitable at some point, but it may not be imminent. That will entail disaster for bonds. Thus, the real (adjusted for inflation) return on the principle could be devastating.
Equities have undergone two major bear markets in a decade and are vulnerable once the present economic recovery falters. Then earnings would fall and declining investor confidence once again would depress almost all common shares. Based on current earnings common shares generally appear to be reasonably priced. However, earnings gains from here will be limited as further productivity improvement is well-nigh impossible and volume advances are dependent on a possible but uncertain business upswing.
The long period of rising prices of all financial assets have placed fundamentals in line with historical precedent. The steady economic growth has increased prices dramatically. That has fueled investor confidence so much that further appreciation is not a strong possibility.
If one were to review the United States stock market (the world’s principal equity market), over a prolonged period, investors have made only small gains, somewhere around three per cent annually, and if there were no change in the dividend payout, the return on equities has been only a paltry 3.5 per cent per year.
For anyone concerned about a return to inflation and looking for a good hedge, real assets are in order, property or commodities. The problem is that they are hard to value. The favourite investment of this columnist over the long term has been gold, which has performed spectacularly well and should continue to do so.
Of course, there are unique situations that could lead to important gains. Investments in new companies, such as Apple, Google, or Facebook, are examples of profit opportunities. Also, there are always common shares that have been unduly depressed, and after a market decline, new possibilities will come into sight.
Therefore, as always, there are no simple answers to the investment problem, no readily available solutions.