7 Questions about the Stock Market and Investing

JP Morgan asked several questions about the global markets, and the question and answers were reprinted in The Financial Times’ blog FTAlphavllle. Asking such questions is a good exercise for investors. Don’t simply look at what the markets and economy are doing. Ask why. The key mistake of many investors is not asking why. It’s why they bought technology stocks in 1999 and real estate in 2005.

• Who [sic] do some many investors pile into safe assets that offer no real return after taxes and inflation? The average yield on all global bonds now stands at 2.4%. Managers tell us that the end investors care most about capital preservation. If so, they are forgetting about taxes and inflation –– global headline CPI was +3.8% oya in 2011. Two explanations come to mind. Institutional investors are steered away from equities, as regulators are forcing them to judge the risk on equities, which are long-term investments, on the basis of short-term volatility (1-year), despite equities being long term assets. G4 insurers and pension funds have been buying $6 of bonds for every $1 of equity over the past 6 years. The puzzle is greater for unregulated end investors, in particular retail. YTD, funds and ETFs have seen the same 6-for-1 bonds to equity inflows. Widespread fear and persistent uncertainty are likely behind this puzzle.