The financial markets go through many different cycles ranging from very short to very long. The last three months have been a great example of short-term swings as each week brought euphoria or fear about the European fiscal crisis and its resolution. The swings in prices based on these emotions set records for volatility of stock prices by some measures.
In the very long-term, there is the general rise in asset prices which has gone on for more than 200 years. The problem with relying on upward trends that can be reliable over a hundred years or more is that the average person’s investment career is more or less contained in a 40 or 50 year period, and far less in some cases.
The cycle I want to review this week is somewhere in between the very short and very long time frames, and is one which investors can position themselves to take advantage of. I’m not referring to the stock market cycle in general, where the market goes up for a few years and then struggles a bit for a year or so, then starts to rise again. Rather, I’m referring to a cycle which is hidden within the asset class broadly known as common stocks.
Over history, it is common for some segments of the stock market to do better than others for periods of time which may stretch into the range of 5 – 10 years. That doesn’t mean these segments are profitable each year, but for the stretch of time referenced one category of stocks will provide much better performance than the others.
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For most of the last 10 years, which granted hasn’t been a barn-burner for equities in general, you would have been far better off owning smaller and mid-size companies than owning the larger companies that make up the Dow Industrial Average or the S&P 500 Index. For example, the S&P 500 Index has averaged a total return -- including dividends -- to investors over the last 10 years of about 2.7 percent. The S&P 400 Mid-Cap Index provided an annualized rate or return exceeding 7 percent during that same time period.
But, while many might take this as a cue to buy smaller company stocks due to their better performance, my message is the opposite. It is now time to examine the opportunities in the larger companies who have under-performed for so many years. By many measures including price to earnings ratios, dividend yields, and opportunities globally, larger companies today present a compelling case for investors to make sure they haven’t abandoned this asset class right at the time when it might be the most valuable.
Personally, I favor larger companies which have a long history of paying and increasing their dividend to shareholders. These aren’t necessarily the highest yielding companies, but those which aggressively raise their dividend year after year may prove to be more valuable in the long-run. As always, a proper diversified asset allocation model should govern the amount you put in any asset class.
Good luck, and good investing.
Tom Breiter, president of Breiter Capital Management, Inc., can be reached at 941-778-1900 or by e-mail at firstname.lastname@example.org