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Why Americans Don’t Own As Much Stock As They Used To

At first glance, the trend of stock ownership in the US is quite declining.  It appears that for most Americans, the percentage of stock in a portfolio is less and less.  That’s scary… but there is more to this story than just another post about investors sitting in cash.

How much stick do investors own


What explains the declining ownership of stocks? In part, it’s the following:

  1. It’s a lack of confidence in the market. Fear of another recession or another bear market. That’s not new.
  2. Over the last 10-15 years, there have been a lot more products and asset classes available that simply weren’t available in the 60s, 70s or 80s. There are now more investment options than ever before available to investors.  Stocks and bonds are no longer the only game in town.
  3. Americans (and Europeans, and Japanese) are aging and becoming more conservative with their investments.


Power of Innovation (Follow Up)

American Funds recently wrote about innovation from a different angle than from my original post: the benefit to the innovative company.  Here are a few highlights:

“The markets often underestimate the impact innovation can have on a company’s growth prospects and future cash flows” – Steve Watson, Portfolio Manager at American Funds.

The technology industry is not the only area investors should look toward for innovative companies.  They can be found in some of the most stable industries.

Thomson Reuters tracks the top 100 Global Innovators and found that spent over $223 billion on R&D but their aggregate performance beat the S&P 500 by 4%.

At the end of the day, innovation is affecting our daily lives.  It has changed the way we shop (e-commerce), the way we communicate (smartphones), and the way we use energy (LED light bulbs) to name just a few. And if that’s not enough, investing in innovative companies may have a positive effect on your portfolio.


Bonds and then Bonds.

The Federal Reserve responded to the financial crisis by dropping interest rates to zero (ZIRP) and by buying massive quantities of bonds and thus flooding the banks with newly created cash. We were told it would short lived. However, five plus years later it is still mostly with us because we are told that the economy is fine but only by a little. Therefore, faced with a banking system flush with cash and the average investor desperate for yield, there has been a multiyear rally in bonds. This rally was interrupted last spring but has since remained calm at marginally higher rates. While this calm lasts, it is important to review what are bonds, and what are bonds.

Bonds have a credit rating. The credit rating is based on the ability of the lending organization to repay the money lent to them. Standard and Poor is a leading bond rating service. Their ratings run from AAA to CCC or lower. AAA are the highest quality bonds. BBB and up are referred to as ‘investment grade’. Investment grade bonds have adequate to extremely strong capacity, depending on their rating, to both meet their dividend payments and return your capital. CCC’s are considered “vulnerable”.

Link to Standard and Poors

This is important because the recent years of yield chasing have dropped the yield on BB and lower bonds to record lows. In addition, these ‘junk’ bonds command a higher premium over their investment grade brothers. Investors rightly required a much higher dividend yield to compensate them for their higher risk. However, this premium is now near historic lows. This makes them vulnerable on two fronts. First, all bonds suffer a decline in current market price if interest rates rise. Second, their current market price will decline if the outlook for their financial stability worsens. So, you have to ask yourself; “Is the extra dividend yield worth the risk?”.

Link to the SF Fed

So there are bonds and there are bonds. It is important that you know which ones you own.

Why I Hate Headlines

With headlines like “Stocks hit all time high”, “Breaking Records: Dow and S&P 500”, or “It Looks Like The Economy is About To Roar”, you might expect to see a remarkable chart showing lots of growth.

But not this time.  Far from it.

After a stellar 2013, the US stock market has limped into 2014.  Perhaps the media is grasping at straws in an effort to keep viewers engaged.  Those headlines sure make things look great.  But the charts tell a different story.

The Internet of Things Will Be Huge

It’s started already. The internet is working its way into our life more and more. It’s connecting our phones, computers, kitchen appliances and our stores to one another. You can control your thermostat remotely, or stream TV shows from the internet onto you TV, or monitor your security system. But that’s just the start.

Bottom line, sensors placed in devices compile data and send it over the internet where it is turned into meaningful information. The implications for businesses, non-profits, and government can help them become more efficient and reduce costs. We are seeing:

  • A farmer easily monitor hundreds of cows to make sure they are healthy while he sits at a computer.
  • Doctors remotely tracking patients with heart conditions.
  • Street lighting adapting automatically based on weather reports
  • Delivery vehicles being rerouted because of accidents up ahead.
  • Smart grids automatically turning down certain household appliances during peak usage periods when brownouts may occur. Or just automatically change when it senses no one is home.
  • A waste management company was able to reduce residential waste by 17% and increase recycling by 49% due in part to monitors tracking usage.
  • Water systems in cities such as Beijing have reduced leaks by 40-50% thanks to sensors placed on many pumps in their infrastructure.

And guess what? That’s still just the start. In just a few years, some people expect more “smart devices” to be in use than smartphones, tablets and computers combined.