Stock market haters, you have a point.
I'm as convinced as ever that stocks belong in the vast majority of portfolios, and that objections to stocks can be addressed with smart planning. But the stock market seems to be fighting back against its true believers. In November, the S&P/TSX composite index has been hovering at levels that are barely ahead of where they were five years ago. Even after a good run last week, the index hasn't even averaged returns of 1 per cent annually over that time.
You could have bought a five-year Government of Canada bond in November, 2010, and made 2.4 per cent a year, and a high-interest savings account would have made you between 1 and 2 per cent a year over that time. Your money would never have been at risk, and the amount of investment stress in your life would have been close to zero.
In a recent column about how suspicious of stocks Canadians are, I warned that safe choices like these won't give you the long-term growth you need to reach your financial goals. The five-year chart for the S&P/TSX composite index reminded me that stock market haters do have a point. Stocks do sometimes look like a risky and pointless waste of time.
Buy them anyway, whether it's through exchange-traded funds, mutual funds or individual securities.
And make sure you take these three steps to ensure success.
The first is to consider dividends as part of your investing results. The most widely quoted measure of how stocks are doing in Canada is the S&P/TSX composite index. A far better gauge is the S&P/TSX composite total return index, which measures share price changes and dividends.
The total return index is what we should refer to every time we talk about Canadian stocks, be it in news reports or in benchmarking our own returns in the domestic market. If we did, the mood of investors might be a little better than it is. For the five years to Nov. 19, the total return index had an annualized gain of 3.7 per cent while the plain old composite index was up just 0.8 per cent.
The dividend yield on the composite index right now is roughly 3 per cent, which means you're getting $3 in dividends for every $100 invested in the index. Stocks may go up or, down but those dividends keep coming. In fact, you should get a little more in dividends every year if you own a well-diversified portfolio of Canadian stocks because there are usually many more companies raising their dividends than lowering them.
Dividends are probably too well regarded these days by some investors. Owning dividend stocks is a great approach to investing, but there will be trying times. Anyone who owns dividend stocks in the energy sector knows this already, and people loaded up on utilities will learn this when interest rates rise. To repeat, you haven't eliminated stock market risk if you focus on dividends.
The second step to success in the stock market is to invest liberally outside Canada. Figure on Canada accounting for one-third of your stock market holdings at most. The rationale for this can be seen in the five-year gain of the S&P 500 stock index, which was about 11.7 per cent annually as of Nov. 19.
Our stock market is loaded with resource stocks that have performed horribly in recent years, while the U.S. market has a much heavier weighting in such strong-performing sectors as tech and health care. It's not that our market is bad – it's just out of sync. Resource stocks had a monster run a decade ago, and they'll be back some day. Meantime, invest in the U.S. and outside North America.
The third step to being a successful stock market investor is to do something that sounds basic, but is actually quite difficult in today's world of instant, constant market chatter. You've got to think long term. Buying a stock or fund is not like trying a new hair style. You don't look in the mirror the next morning and decide it's a mistake.
It's understandable if you see the lost half-decade of Canadian stocks as a sign that the market isn't a good place for your money. But the real lesson is that five years isn't a long enough period over which to judge your success in the market. Talk to me in another five years.
Rob Carrick