Time to Wade back into Equities?

So, you’ve been sitting on the stock-market sidelines these past few months, watching as the U.S. market indices – the S&P, Dow and Nasdaq – march ever higher. And here you are, with your cash safely tucked away in a bank savings account or a GIC or a low-yield bond play and you are asking yourself: Is it time to wade back into equities? Is it safe to test the waters – or do the risks outweigh the potential returns?

Well, only you can provide the answer to that little dilemma, but you certainly know what you have missed: double-digit U.S. market returns over the first 18 weeks or so of 2013. Toronto has stumbled and fallen behind its American counterparts, but there are segments of the TSX that have actually moved ahead; it’s been the materials sector – the natural-resource commodities – that have hammered the TSX. The banks, the insurers, the techies, the consumer staples, have actually done half-decently this year.

Time to get back in? Well, here at 5i, we have a natural inclination toward equities investment, so the broad, general answer is a decisive maybe. Your own personal financial situation and your appetite for risk will likely determine how quickly and deeply  you dive back into the equities pool, but there are good reasons to give the matter some considerable thought.

First off, corporations are lean and mean and swimming in profits and cash hoards; dividend increases have come thick and fast this year – and there’s plenty of room for more of the same on the horizon. The U.S. housing market is very much in recovery, but that recovery is still in its early stages – and what tends to be good for U.S. housing tends to be good for the markets overall and Canada in particular. Growth has slowed globally, but there is still growth – and the European Central Bank just recently primed the pump by cutting its key bank rate to 0.5%, an historic low, with the promise of more cutting to come, should it be necessary, to combat unemployment.

In April, in the U.S., the economy added 165,000 new jobs, a number far better than had been anticipated, and yet another indicator of economic recovery. February and March job-creation numbers were also revised upward. The markets rewarded those numbers by pushing the S&P 500 index beyond 1,600 for the first time ever. Laszlo Birinyi, head of the highly regarded Birinyi Associates market research firm, is now calling for the S&P index to top the 1,900 watermark as the U.S. domestic and export economy continues to strengthen.

And so, the question again: What should a sideline-sitting investor to do? Well, how about just tip-toeing back into the water? Leave half of your investment capital where it sits now – banks, bonds etc. – and use the other half to invest in mid- to large-cap, dividend-paying defensive stocks. You’ll get a margin of safety because you’re buying quality companies, and you are likely to get a three or four per cent dividend payout for assuming that level of risk. And you stand a very good chance, given that the markets have rewarded divvy-payers very handsomely these past few months, that you could also see a respectable capital gain on the stock price as well.

Experienced investors may be able to make their own buying decisions from the safety and comfort of their couch. Those less experienced should consult a respected investment advisor. Please remember: This is not a get-rich-quick “trading” strategy. This is an “investment” strategy, one that calls for patience and discipline and time. 

Don’t fight the tape; don’t fight this positive market trend. Get your money out of the mattress and put it back to work for you. Do it safely and smartly and perhaps in small increments – and you’re likely to find that the stock market waters are safe for swimming!