· Mendoza Private Wealth is a boutique private wealth management practice focused on objective research, planning and investment management.
· With markets in turmoil, investors sometimes forget the why they own equities in the first place.
· If things are so uncertain, does it makes sense to run away from equities for a while or dramatically unweight equities in favor of other asset classes?
· In today’s video, we will discuss the Role that Equities play in your portfolio why they matter.
· Equities are an important component of a properly diversified portfolio.
· Arguably, globally diversified equities should be a core component of almost any long-term investor’s portfolio.
· The intention of the asset allocation process is to spread capital across a variety of asset classes that can contribute to returns and manage risk in different ways.
· The asset class that we most often look to for growth is equities.
· With a history of almost a hundred years, the US stock market, for example, has shown that owning equities for the long-term can meaningfully contribute to wealth accumulation.
Not all, but some equities also pay a cash dividend, which can help satisfy a client’s cash flow needs as well.
· Equities are also one of the investor’s greatest tools in protecting themselves from the long-term effects of inflation.
· However, equities come along with some level of risk and market volatility.
· This is why some investors feel like they need to own equities but at the same time, they sometimes also feel like they want to run away from equities due to temporary unrealized losses or market volatility.
· If you are in private practice, this notion around the push and pull of equites is kind of like getting a case that you find intellectually stimulating, but you also know it comes with some level of risk, and of course, a ton of work.
· That is exactly how many investors feel about equities.
· In the short term, investors sometimes want to run away from equities due to the perceived risk and / or volatility, but often do not do that because they understand the potential long-term benefits.
· Capital appreciation
· There are two sources of returns to equities; the first comes by way of capital appreciation.
· This is the classic case of buying low and selling high.
· Although it may not be easy to always get the timing right, in the long run equities have been among the highest returning asset classes.
· Equities are the growth engine of your portfolio.
· If properly vetted and diversified, a core holding of globally diversified equities should be the primary driver of long-term portfolio returns.
· Most of long-term wealth accumulation comes from the appreciation of capital, meaning, an increase in the price of the investments you own.
· A focus on capital appreciation also helps you accumulate wealth in a tax-efficient manner.
· Equities allow you to decide exactly when to realize taxable gains, which provides you with further control over your long-term wealth accumulation.
· Dividend income
· The second source of return to equity investors is dividend income.
· While dividend income may not be the primary contributor to long-term returns from equities, dividends provide a meaningful benefit.
· Younger companies that are still in growth mode are unlikely to pay dividends because the money is often reinvested within the company.
· Companies that are more mature and have been successful in creating profits are able to pay a dividend to shareholders, which in turn attracts certain types of investors.
· Retirees, pension plans, insurance companies, are all among the largest investors in dividend-oriented equities.
· This is because receiving steady cash flow every year creates both an opportunity to re-invest it or use it to offset ongoing expenses.
· Dividends are an important component of the returns that equities generate in a properly diversified long-term portfolio particularly for fixed income investors.
· Dividend income provides a steady reliable stream of cash that can satisfy a variety of different needs.
· Reinvesting those dividends can provide a meaningful accretive benefit to long-term wealth accumulation.
· Inflation protection
· There are at least three great unknowns for a long-term investor:
· How do I protect against deep and prolonged bear markets?
· Will my assets be able to keep up with inflation?
· Do I have enough to last the rest of my life?
· To accumulate and protect wealth, our assets should keep pace with or ideally meaningfully out-run inflation.
· Equities are one of the asset classes that has the best opportunity to do so over time.
· Real growth should come by way of real returns.
· Meaning, the portfolio return minus the rate of inflation equals real return.
· Over time, equities should be able to exceed inflation by a meaningful amount to create ‘real’ or ‘inflation-adjusted’ growth.
· This is important because inflation is a silent destroyer of wealth.
· If inflation were currently 3% for example, then compared to January 1st, a $100 bill in your pocket would only be worth about $97 on December 31st.
· This is because inflation has robbed that hundred-dollar bill of 3% of its purchasing power over the course of a full year.
· While 3% in one year may or may not seem like a lot to you, over five, ten, twenty, thirty years, the effects are cumulative.
· For your assets to have any chance of either keeping up with, or outrunning inflation, on average and over time the rate of return must be in excess of inflation.
· Equities have historically demonstrated the ability to hedge against the eroding effects of long-term inflation.
· The role of equities is to provide both long-term growth and diversification.
· During times of financial stress, it is tempting to run away from equities because of the volatility and the psychological anxiety that may arise.
· This is typically the worst possible mistake a long-term investor can make.
· By staying in equities and especially contributing to portfolios during times of financial stress, investors are essentially running toward equities when it is most uncomfortable to do so.
· This is not by accident.
· Successful investors understand this is because of the role equities play in providing portfolio growth, income, and inflation protection.
· To learn more about how equites can help you stay on track to reach your most important financial goals, reach out to us via email or call us at your convenience. We would be delighted to be of service to you.
· Thanks for watching and please feel free to share this video link if you think someone might benefit.
· See you next time.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments in equity securities are generally more volatile than other types of securities. There is no guarantee that dividend-paying stocks will return more than the overall stock market. Dividends are not guaranteed and are subject to change or elimination.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Mendoza Private Wealth is a separate entity from WFAFN.