My how the mighty have fallen. I'm talking about the standing stocks have with peoples' savings these days. On the first down day in ages, it's worth pondering how stocks, at least according to a recent poll, have lost their appeal to Americans.
According to Bankrate, real estate and cash are the most popular investments these days. That's right, in a survey of 1,000 adults who were asked what they would do with their money if they didn't need it for 10 years, 25% said they would buy real estate and 23% would keep it in cash. Only 16% said they would put it in stocks, the same percentage that would choose to have their money in gold or precious metals.
As someone who has lived and breathed stocks for most of his life, this is a horrendous finding. But it is not surprising. So often, when I am on television with David Faber and Carl Quintanella, my partners on "Squawk on the Street," I will hit up a major stock at, say, 9:45 a.m. and see only 200,000 shares have traded in it.
How do you gauge that's a small amount? OK, I managed a half-billion dollars when I ran my old hedge fund and it would not be unusual for me to put in an order to buy 200,000 shares of a big-capitalization stock like the kind I am talking about and expect it to be completed -- meaning I bought the stock -- within minutes of when I entered the order. Now I would be 100% of the volume of the same stock.
There's not that much volume anymore because there isn't that much interest anymore. The vast bulk of Americans who set up 401Ks and IRAs in the '80s and '90s flooded the stock market with their retirement savings. Many didn't give it much thought. They just bought stocks in mutual funds or with an IRA they bought individual stocks and funds.
I can recall when we used to come in Monday morning and be astounded about the transom money that flowed in pretty much on autopilot. We called it transom money because of the image of money simply being thrown over the transom. Many Mondays were simply up days because the market couldn't absorb the volume of money without moving the stock market higher.
But all that has changed, caused by successive waves of mistrust, abuse and fear that's become ingrained in the American people.
Before I go into whether those allocations make sense, let's go over all of the big reasons why people fled the market.
First and foremost, for 15 years stocks were pretty much regarded as the mainstay of your retirement account. Stocks owned for the long term had always produced above-average returns vs. all of those other asset classes. We used to call it the greatest story ever told, meaning the love affair with stocks in 90 million households.
But then we saw the dot-com crash, the one that took the Nasdaq apart from March 2000 until October 2001when the Nasdaq fell from about 5,000 to 1,100. Even after a remarkable run back to those levels, lots of stocks are still way down from them, or just don't exist. Don't forget there were more than 300 IPOs right before that period and almost none of them survived. Lots of stocks still haven't come back.
Think about Intel (INTC) , which traded at $75 in 2000 that now resides at $34, down a buck today after a fairly mediocre quarter. Or Cisco (CSCO) , which we think of as on fire these days, making multi-year highs at $30, which hit $80 in 2000, 50 points higher. It was only recently that Microsoft (MSFT) took out its high. Of course, it wasn't just the Nasdaq. General Electric (GE) reports tomorrow and, at $32, it's been one of the strongest Dow stocks of late. But it traded at $60 in 2000. So, the destruction was pretty horrendous.
The market enjoyed a good run until, once again, stocks barely held up during the Great Recession with a host of big-capitalization names vanishing and whole sectors, like the banks, which were popular for big dividends, just crushed.
The market bounced back, yet in 2010 we had the flash crash where stocks lost almost 1,000 points in 26 minutes. Then in 2011 we caught an almost 20% decline not because of anything here, but because of Europe. Since then we have had a multitude of big declines, the worst being a couple of days in August where the Dow plummeted from 17,545 to 15,666, this time because of China.
Throughout this time we have had to hear about swindlers like Bernie Madoff, or banks that didn't play by the rules, or mutual funds that invested recklessly, just endless.
In other words, the sector lost peoples' trust and it has never earned it back. That's why the day after Brexit we saw one of the biggest redemption days ever, because, once again, people just plain got scared.
As much as I love stocks both as an asset class and as puzzles to be solved, I know that it's getting lonely out there.
But now let's deal with the alternatives. We see that 25% of the people want to invest in real estate. I find this a rather remarkable statistic because real estate, while perceived as reliable, lost a great deal of value just a seven years ago. Moreover, it's no bargain. There are areas of the country, like California, where it costs $1.3 million for a starter home. I like real estate, I dabble in it, my wife works full time in it and we are hard pressed to find bargains. It helps that rates are low, but they are only low if you can take advantage of them and banks won't give most people the money they need to cash in on remaining bargains.
How about cash? You have a 10-year horizon and you keep it in cash what happens is you are basically dooming yourself to losing money vs. inflation. We all know costs go up. You need you money to work for you. It's working against you in cash. Precious metals? I like them as an insurance policy. I want everyone to own some gold.
But here's the deal. If you can find stocks of companies with good balance sheets that pay good dividends and have a bit of growth, I think, if you reinvest those dividends over that 10-year period, you could crush the returns of these other assets. I just think you will do so much better.
Of course, you can always choose an index fund and I have no qualms with that. Low costs and own for the long term. But I like the hybrid model of investing. That means, if you, too, have a 10-year horizon, I want you to put your first $10,000 in savings in an index fund. After that, try to allocate at least $1 out of every $10 you are saving to picking individual stocks, with a mixture of high-growth and slower-growth, with some income and then higher-yielding stocks with a modicum of growth. Be sure to reinvest all the dividends, to avail yourself of the miracle of compound interest. I am not saying that stocks are the only game in town. I am saying that they are, in the end, a crucial part of your savings and I am urging you not to abandon them for at least some of your money.
I think, given the fairly checkered history of stocks, it really doesn't matter. People aren't coming back. Nonetheless, I am pretty confident that over the next 10 years you will do a heck of a lot better with my allocations than the ones people have chosen in the Bankrate survey and not just because I think stocks are good, but because I see tremendous weakness in the alternatives.
To sum it up, I know that stocks are a disgraced asset class. That's what this survey shows. Yet, I can tell you that while the others aren't disgraced, they aren't the kind of alternatives that can produce enough of a return to rival owning good stocks, the kind we find all of the time, the kind that will earn you more over 10 years if you can just handle the inevitable pain and ride it out to a much better nest egg.