The Rooster Calls--Is Your Portfolio Sleeping?

Rumor has it the stock market is due for a crash. Phooey. That's always the rumor.

"The market rally is lasting too long! It's the second-longest in history! We haven't had a 20% correction since before the last Olympics."

The longest rally was 1987 to 2000. This rally is longer than most, but half as long as the record-setter. The duration is a consequence, not a cause. Consider the words of Robert Collier: "Success is the sum of small efforts, repeated day in and day out."

Investments, over long periods of time, behave rationally. Investors put their money where they believe they will get the best long-term return on investment. We choose stocks because we believe in the future earnings of these companies.

Thank you for your patience with this simplification. I fear the rooster may wake you from the slumber of common sense, and the alarm bells of CNBC may distract you from this plain and simple truth. Rest a few minutes longer.

Some companies have a greater chance to make more money (grow faster) than other companies, but they are usually more risky. The faster they go, the more they are likely to stumble. Other companies have modest goals with potentially better chances to succeed.

Management of a public company reports the company's financials because they A) are required to do so by countless regulations; and B) because they want investors to buy more shares. Analysts forecast the future earnings with this information.

Here is a chart of the history of these forecasts from JP Morgan. When the line is high, investors are paying a lot of money for a small expected future return. When the line is low, investors are paying a small amount of money for a large expected future return.

                                  (Click on the chart to see it in a larger, legible size.)2016 08 10 spfe

When the line is low, investors are fearful. Collectively we perceive greater risk than usual that companies will not meet their earnings forecasts. The opposite is also true: When the line is high, investors collectively are confident.

Today's stock prices are very close to the long-term average. We are well within the one standard deviation of the long-term, historical average for a reasonably priced stock market. We talk all the time about the scariness of the market, but the preponderance of evidence says this is another hum-drum, average day/month/year/multiple-year rally.

Dividends are also average. The S&P 500 dividend yield is at, or around, 2% per year. Today, dividends are rationally priced at long-term historically average levels.

Stock prices today, in spite of politicians, deadly insects, steroid-popping Russian Olympic spies, are rationally priced based on the consensus expectation of future earnings. Over long periods of time--the duration of our lifetimes--earnings determine stock prices.

Providing an income for the duration of our lifetimes is our core concern. I'm talking about how to invest a lifetime of savings that will potentially last a lifetime or longer. That seems reasonable.

Speaking of reasonable, did I mention the irrationality of bonds? You can't buy a 10-year treasury and earn more than $1.50 for every $100 you have invested, every year, for the next 10 years. So, where you going to go?

The stock market is the answer for many long-term, rational investors. History shows that dividends grow faster than inflation, and stock prices grow faster than that. The rooster calls. Now back to your regularly scheduled paranoia, I mean, news.

Read more on stocks and stock dividends:

http://www.advisorperspectives.com/articles/2014/09/09/growing-income-and-wealth-with-high-dividend-equities

http://www.cfapubs.org/doi/pdf/10.2469/faj.v59.n2.2510

Make it another great week!

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