How to play this Market for the Long Haul!!!!
It has been a very bumpy ride and sometimes scary for the individual investor over the last year. Most of it is being driven by the uncertainty overseas and the lack of leadership in our own government. I wish I could say that this credit crisis / political juggernaut will be ending soon, but it does not seem to be closing any gaps. With that being said, there is a slight silver lining.
The US stock market has seen extraordinary gyrations from the extremes of 5% moves in one day for 4 days straight, something that has never occurred before. With all of this we need to look at the value of the market and where to generate the best long term investment and maintain our discipline investment allocations. Currently, our the S&P 500 is considered by many to be very undervalued, that is of course how you look at the numbers. The main number that I am concentrating on is the dividend yield of roughly 2.00%. This is what you might be paid to stay invested in the S&P 500 index. If we take this number and compare it to the risk free rate (US treasuries) we can make some very informative decisions on riding this market out.
Currently the US 2 year Treasury is yielding .25%, the 5 year a modest 1.0%, and the 7 year 1.75%. With yields this low, you have to ask yourself do you feel that the S&P 500 will be at the level it is now in 5 years. If so, why wouldn’t you keep your money in the S&P 500 and collect a 2.00% dividend rather than 1.0 % that the US government would pay. Not to mention if we do see growth potential out of this volatile market over the next 5years you will reap that benefit.
It is very important to make this case as people tend to panic in environment like this and pull their money out of the market and run to the safe haven US treasury. We believe that being disciplined in your asset allocation and not trying to time a market like this will not only weather the storm, but in this case actually earn more in income.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The S&P 500 is an unmanaged index and cannot be invested into directly.