Why invest in stocks?

Transcription

Why invest in stocks?
Joseph E. Buffa, Equity Generalist
Kent A. Newcomb, CFA, Equity Generalist
Why invest in stocks?
2013
Why should someone invest in stocks? Because historically, stocks have performed well when compared to
other long-term financial assets and have typically outpaced inflation. Keep in mind that past performance
is not a guarantee of future results.
Figure 1 – Investment in the US capital markets 1926-2012
$10,000
S&P 500 $3,525
$1,000
Long-Term Corp Bonds $174
Long-Term U.S. Gov't Bonds $123
$100
U.S. Treasury Bills $21
$10
Inflation $13
$0
S&P 500
Long Term Corporate Bonds
Long Term U.S. Government Bonds
Dec-10
Jun-08
Dec-05
Jun-03
Jun-98
Inflation
Dec-00
Dec-95
Jun-93
Jun-88
Dec-90
Jun-83
Dec-85
Jun-78
Dec-80
Jun-73
Dec-75
Dec-70
Jun-68
Jun-63
Dec-65
Dec-60
Jun-58
Jun-53
Dec-55
Jun-48
Dec-50
Jun-43
Dec-45
Jun-38
Dec-40
Jun-33
Dec-35
Jun-28
Dec-30
Dec-25
$1
U.S. Treasury Bills
Sources: Ibbotson Associates, Wells Fargo Advisors. Past performance is no guarantee of future results. Hypothetical
value of $1 invested at the beginning of 1926. Assumes reinvestment of income and no transaction costs or taxes. This is
for illustrative purposes only and not indicative of any investment. An index is not managed and you cannot invest
directly in an index. Inflation is measured by the Consumer Price Index for all urban consumers, not seasonally adjusted.
Treasury bills and government bonds, unlike stocks and bonds, are guaranteed by the U.S. government and if held to
maturity, offer a fixed rate of return and fixed principal value. Yield and market value of bonds will fluctuate prior to
maturity. The principal value of an investment in stocks fluctuates with changes in market conditions.
Please see page 11 for Disclaimers
Page 1 of 11
Why invest in stocks?
In this report, we will examine the following:
• the record of long-term returns, in both nominal
and real (inflation-adjusted) terms, of key asset
classes, the volatility of stocks versus other asset
classes, the total return potential of dividend
paying stocks,
• strategies for reducing a portfolio’s risk, and
• investment ideas for the stock investor.
What is stock?
Common stock is a type of security that represents
an ownership, or equity interest, in a company. It is a
claim on a portion of the company’s earnings and
assets. Some people avoid buying stocks because
they think the stock market is too risky, that stocks
should be bought only with money that can be lost
without resulting in undue financial strain. Although
it is true that an investment in stocks carries the risk
of principal loss, what we are talking about in this
report is prudent, long-term stock investing; not
speculating in the hot concept du jour or in a stock
for which little or nothing is known about the
underlying company. The prudent investor buys
stock in high quality companies and participates in
any earnings remaining after the fixed claims of
other securities. In exchange for taking on a higher
level of downside risk compared to a fixed income
investment, a stockholder should have greater
opportunity for capital appreciation given the
stock’s potential to reflect the growth of the
company’s earnings.
Figure 1 depicts the hypothetical outcome of one
dollar invested in each of several different financial
asset classes in 1926, and held through 2012. All
proceeds were reinvested; in other words, dividends
received were used to purchase more shares of stock
and interest payments from bonds were used to
purchase more bonds. The study shows that stocks
have significantly outperformed both corporate and
government bonds and T-bills over the 87-year
period. What investors may not appreciate when
looking at Figure 1 is how dramatically stocks have
outperformed other asset classes over this period, as
Figure 1 uses a logarithmic scale for the vertical axis
in order to fit the graph on a single page.
2013
Many investors, worried about day-to-day volatility,
shun stocks and stay with historically more
conservative fixed-income investments. Of course,
fixed-income investments can and should have a
place in a well-diversified portfolio. Government
bonds and Treasury bills are guaranteed by the U.S.
government, and if held to maturity, offer a fixed
rate of return and principal value. Yet, as illustrated
in Figure 1, history has shown that over time fixedincome investments have significantly
underperformed equity investments.
Inflation takes its toll
There are two primary risks to one's investments:
volatility, the near-term risk that price fluctuation
could result in selling an asset at a lower price than
what one paid for it; and inflation, the longer-term
risk that investment returns will not keep up with
the rising cost of living.
As shown in Figure 2, fixed-income investments
have not done a good job historically of outpacing
inflation. If investors own only bonds and Treasury
bills, it could be difficult over time to maintain the
manner in which they have become accustomed to
living, i.e., because of inflation, investors run the risk
of outliving their assets. Historically, only stocks
have provided a noteworthy return over time after
taking into account the eroding effects of inflation.
Because of inflation, we believe it is important that
all investors seek at least some growth potential in
their investments. Even investors whose primary
objective is receiving current income must try to
keep up with the rising cost of living. Historically,
stocks have been one of the better investment
vehicles for providing growth. Over long periods of
time, stock prices tend to move up as earnings, cash
flow and dividends increase, potentially providing
attractive total returns to investors in such stocks.
Companies that consistently increase their annual
dividend rates give investors the potential to keep
up with or outpace the effect inflation has on the
cost of living. Investors who are looking for high
current income may find better yields in the fixedincome arena. But, to receive growing income, we
feel it is necessary to consider dividend-paying
stocks.
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Why invest in stocks?
What about the volatility?
As shown in Figure 2, since 1926, the average annual
standard deviation (a common statistical measure
used to measure the volatility of investment returns)
of stocks has been 20%, 8% for long-term corporate
bonds, 10% for long-term government bonds, 3% for
T-bills and 4% for inflation. The stock investor
historically has had to tolerate more than twice the
volatility of the long-term bond investor. In other
words, the stock investor has had to be willing to
withstand a good deal more risk than the fixedincome investor.
As compensation for this extra risk, the cumulative
total returns of stocks in our illustration have been
20 times greater than long-term corporate bond total
returns ($3525 vs. $174), nearly 29 times greater than
long-term government bond total returns ($3525 vs.
$123), and 168 times greater than Treasury bill total
returns ($3525 vs. $21) over the time period reviewed
(1926-2012).
Some investors are not able to tolerate an
investment that can deviate as much as plus or
minus 20% a year or more on average. It is important
that an investor know and understand his tolerance
for volatility well enough to determine the amount
of risk that can be assumed. A risk-averse investor
must also understand that he cannot expect the
kinds of returns that only more volatile investments
like stocks typically offer.
In portfolios with an investment time horizon of five
years or more, a strong case can be made for a
significant stock component in the portfolio,
because time offers long-term investors a better
opportunity to achieve the positive returns that
stocks can offer.
Over long periods of time, stock prices tend to move
in recognition of the underlying company’s growth
potential. If the valuation of the stock moves to
levels greatly in excess of the company’s growth rate,
the stock could be vulnerable to a pullback.
Conversely, valuation levels well below a company’s
growth rate might portend a rally in the shares at
2013
some point. In our opinion, it is difficult for a stock to
sustain a valuation not supported by the growth of
the underlying business, as company fundamentals
generally drive the direction of stocks. In the short
term, emotional factors such as fear and greed can
cause stock prices to bounce around, sometimes
dramatically, on a daily basis. But over the long term,
we believe that the success or failure of the company
to grow is what ultimately determines the direction of
its stock price.
The long-term trend of stocks has been up. If you
want the potential to participate in the stock market,
it is imperative to know what is realistic in the way
of risk (volatility) and return, and to be prepared to
deal with it.
How can we apply this notion of volatility and return
to an individual stock? Suppose a company is
expected to increase earnings 10% per year. All other
things equal, a company with 10% annual earnings
growth should, maybe not every year, but over time
have a stock that offers roughly 10% average annual
price appreciation. With historical data from Figure
2 in mind, an investor must be able to tolerate about
twice as much in the way of annual volatility (i.e.
standard deviation) as return. So, an investor must
be able to tolerate a drop in stock price of about 20%
for the potential to earn that anticipated 10% annual
return.
It’s understandable if periods of strong volatility and
steep price declines scare away investors. However,
if investors bail out of the market during periods
when the indexes are negative, they risk missing the
potential rebound, a point we will illustrate later in
this report. Wise investors don’t forget the market’s
potential for long-term return.
We think market participation is critical throughout
all kinds of circumstances. Despite wars,
terrorism, politics, economic swings, interest rate
changes, and numerous other recurring concerns,
over the long term the share prices of good quality
companies have tended to follow in relation to
their growth. We think that trend will continue
over the long term.
Page 3 of 11
Why invest in stocks?
2013
Figure 2 – Summary of returns (1926-2012)
Nominal
Average
Average
Annual
Compound Standard
Cumulative Annual Deviation
Index Value
Return
(Risk)
S&P 500
$3,525.34
9.8%
20.3%
Long Term Corporate Bonds
$174.12
6.1%
8.4%
Long Term US Government Bonds
$123.12
5.7%
9.8%
Treasury Bills
$20.57
3.5%
3.1%
Inflation
$12.81
3.0%
4.1%
Real (Inflation Adjusted)
Average
Average
Annual
Compound Standard
Cumulative Annual Deviation
Return
(Risk)
Index Value
$275.24
6.7%
20.3%
$13.59
3.0%
9.5%
$9.61
2.6%
10.8%
$1.61
0.5%
3.9%
-
Sources: Ibbotson Associates, Wells Fargo Advisors
*Please see the bottom of page 1 for descriptions and disclaimers. Figures are shown for illustrative purposes only and
assume that $1 was invested in 1926.
How can you deal with volatility?




Diversify. Owning stocks from several sectors
with different investment characteristics is a
good strategy designed to smooth out the
performance of the entire investment portfolio
over the long run. (Diversification does not
guarantee a profit or protect against loss.)
Stick with good quality companies, with
measurable fundamentals, so that you can
determine reasonable expectations for their shares.
Understand what is realistic in the way of return
and volatility.
If you get meaningful profits, lock some in along
the way.
Don’t be scared out of the market by big daily point
moves. As illustrated in Figure 1, the long-term trend
of large-cap stock prices has been up. Stocks are
financial assets that give investors the potential to
keep up with inflation and build wealth over time.
To participate in the stock market, it is necessary to
understand and accept the inherent risks and
volatility that inevitably follow. But, if you own stock
in companies that you know and understand, with
products and services that are in demand and are
likely to stay in demand in the future, then near-term
stock market action should not deter you from
participating in the company’s long-term growth
potential.
Think total return
Historically, about 45% of the roughly 10% average
annual total return from stocks has come from
dividends and 55% has come from price
appreciation. For instance, over the 87-year period
(1926-2012) depicted in Figure 1, the S&P 500
generated a total return of 9.8% per year on average,
and approximately 5.6% per year on a price only
basis (5.6/9.8 = 57%).
What is not shown in Figure 1 is the fact that capital
appreciation alone led the dollar invested in stocks
in 1926 to grow to $112 by the end of 2012, an
average compound annual return of roughly 5.6%.
The remainder of the $3,525 total return from stocks
was achieved by collecting the dividends paid,
purchasing more shares of stock, and enjoying the
benefits of growth compounding. By this measure,
3.2% of the total return ($112) came from capital
appreciation, while 96.8% ($3,525-$112=$3,413) came
from dividends and dividend reinvestment.
The compounding power of dividend
reinvestment
A stock investor can potentially benefit in two ways
from the growth potential of a company. A company
can reinvest all or some portion of its earnings back
into the company to develop new and existing
growth opportunities. This can result in potentially
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Why invest in stocks?
higher earnings. Then, if the company pays out to
shareholders a portion of its earnings as dividends,
the growing company may be able to increase the
amount of dividends it pays out as its earnings grow.
If the disciplined stock investor then reinvests those
dividends in more shares of stock, the total return
from that stock investment may exceed the return
from one where dividends are harvested and spent.
Recall from the discussion of Figure 1 and Figure 2
that over 95% of the total return from holding a $1
investment in stocks from 1926-2012 came from
dividends and their subsequent reinvestment into
additional shares of stock.
Ask your financial advisor about dividend
reinvestment, an automatic service that allows you
to take full advantage of the compounding growth
potential of your dividend income. Of course you
will need to consult with your financial advisor to be
sure that your current income needs are being
properly met before initiating a dividend
reinvestment plan.
Calculating total return
When determining whether or not to invest in a
company, most people like to have an idea as to the
company's growth potential. An analyst's job, in
part, is to make projections about how much a
company is expected to grow. For some companies,
the most important factor is earnings growth; for
other companies, cash flow or dividends could be
the critical factor to determine their growth rate.
Regardless, history has shown that over long periods
of time stock prices tend to move in recognition of
growth. Therefore, when estimating what an
investment could return to an investor, it is useful to
look at the analyst's projected growth rate– be it
earnings, cash flow, or dividend growth.
But, looking only at the growth rate could be
misleading. For instance, suppose an investor
bought stock in a company that paid a $1.00
dividend, and the stock's price rose from $40 to $50
during the year. The investor's total return would
have been 27.5% ($50 ending stock price + $1
dividend [i.e., $51] divided by $40 beginning stock
price = 27.5%). If the investor calculated only the
percentage change in price movement ($50 divided
by $40 = 25%), she would have understated her
2013
increase in wealth by 2.5%, the dividend yield when
the investment was purchased. In other words, it is
important to consider the entire change in value, or
total return– income received as well as change in
price.
Projected Total Return (%) = Estimated Growth Rate
(%) + Yield (%)
Here's another illustration: Suppose a company pays
an annual dividend of $1.00 per share. If the stock is
trading at a price of $40, the current yield is 2.5%
($1.00 divided by $40 = 2.5%). The analyst projects
that the company should be able to increase its
dividend 5% per year.
If the company does in fact raise its dividend 5% the
next year to $1.05 per share, and the yield remains
stable at 2.5% on the higher dividend, the stock
would trade at $42 ($1.05 divided by 2.5% = $42), all
else being equal.
To determine the total return to an investor in this
example, add the 2.5% dividend yield that has been
collected during the course of the year, plus the 5%
price appreciation ($42 divided by $40 = 5%), for
roughly a 7.5% total return.
We can carry this out another year, raising the $1.05
dividend by 5% to $1.1025 per share. To yield 2.5% on
the higher dividend, the shares must trade at $1.1025
divided by 2.5% = $44.10. The total return for year
two of 7.5% equals the 2.5% dividend yield plus 5%
price appreciation ($44.10 divided by $42 = 5%), or
roughly 15% in total return for the two-year period.
Our illustration is purposefully simplistic. The yield
and estimated dividend growth are only two of a
large number of factors that determine a stock’s
market price.
Using earnings growth estimates and P/E ratios
as a proxy for stock price movement
This exercise of using dividend growth estimates to
determine where we think a stock's price could go
over time is very similar to one in which analysts are
making earnings per share (EPS) estimates and
examining price/earnings (P/E) ratios to gauge a
stock’s upside potential. For example, suppose a
Page 5 of 11
Why invest in stocks?
company is expected to earn $5 per share this year
(2013), $6 per share in 2014 and $7 per share in 2015.
If the shares are currently trading at $50, the P/E
ratio is 10 times ($50 stock price divided by $5
estimated earnings per share). If P/E multiples
remain stable, by the year 2015 when this company
is expected to earn $7 per share, the shares could be
trading at $70 ($7 EPS estimate multiplied by 10
times P/E multiple). If all this comes to pass, the
shares would have increased 40% ($70 divided by
$50 = 40%), or an average 20% per year, in line with
the roughly 20% per year increase in earnings.
Over long periods of time, stock prices tend to move
in recognition of growth– be it cash flow, earnings or
dividend growth, or some combination thereof.
How rising dividends and fluctuating interest
rates affect stock prices and total returns
The problem with the exercises we just walked
through, though, is that they assume a stable
interest rate or P/E multiple environment.
Unfortunately, in real life, neither interest rates
(yields) nor P/Es remain stable for very long; they
fluctuate. As yields change, prices typically change
in the opposite direction (i.e., higher yield leads to
lower price).
All types of investments compete for investors'
funds. Therefore, as interest rates and dividend
yields fluctuate, prices also fluctuate to adjust to
changing investor requirements. The inverse
relationship between yield and price explains some
of the volatility in stock prices, as yields constantly
change. Companies that raise dividends appeal to
investors because dividends that increase as
corporate earnings rise have the potential to amplify
a stock's upward price momentum when yields are
stable or falling, and may help cushion the stock's
fall when yields are rising.
The hypothetical examples presented in Figure 3
demonstrate the effects dividends and interest rates
could have on a stock’s price and total return. For
the purpose of this exercise, we assume that a
stock’s current dividend yield acts as a proxy for
market interest rates; that is, as interest rates rise, an
investor’s required current yield from stocks will
2013
also rise. We suggest readers take a few minutes to
review Figure 3 before reading further.
Notice that in the increasing yield with rising
dividend case (Scenario 2), rising dividends provide
a cushion for the stock (0.6% total return) when
compared with the -16.1% return from the constant
dividend and rising yield case (Scenario 1).
Scenario 3, which contemplates an average annual
total return of 7.5% (2.5% from stable yield and 5%
from annual estimated dividend growth) would
result in a roughly 35% total return over a five-year
period.
The total return after five years with interest rates
(yields) rising one-quarter percentage point and
dividends rising 5% each year (Scenario 2) were only
marginally positive. That is why we say that the
dividend growth estimate is only a proxy for the
amount by which we think the stock's price will
move, as rising interest rates (i.e., yields) basically
offset the positive impact on total return expected
from dividend growth in Scenario 2.
Figure 3 excludes two other basic scenarios (stable
dividend, stable yield) and (rising dividend,
declining yield). For comparative purposes, the
stable dividend, stable yield scenario would produce
a total return for the five-year period contemplated
of 12.5%; basically the $5.00 in dividends collected on
a beginning (and ending) price of $40 [($45/$40) - 1
x 100 = 12.5%]. In a rising dividend (+5% per year) and
declining yield environment (down .25% per year),
the cumulative (5yr) total return would be 117%
[$5.53 dividends + ending stock price of $81.33
($5.53/1.5%) / $40 - 1 x 100 = 117%].
Changes in yield typically impact an investment's
total return. Just as it is very difficult to anticipate
the direction and magnitude of interest rates or
yields, it is also challenging to quantify the impact
that changes in yield will have on an investment's
total return. The simplistic scenarios outlined in
Figure 3 suggest, however, that rising dividends can
provide downside support for stocks in a rising
interest rate environment (Scenario 2) and can
amplify a stock’s potentially positive return in a
Page 6 of 11
Why invest in stocks?
2013
Figure 3 – Hypothetical total return scenarios 1
Scenario 1: Dividend remains unchanged, yield increases 25 basis points (one-quarter percent) per
year
Stock Price
Dividend
Current
(Dividend/
Total
Rate
Yield
Yield)
Return
Year 1
$1.00
2.50%
$40.00
Year 2
$1.00
2.75%
$36.36
Year 3
$1.00
3.00%
$33.33
Year 4
$1.00
3.25%
$30.77
Year 5
$1.00
3.50%
$28.57
-16.1%
The -16.1% total return is calculated by taking the sum of all the annual cash dividends, $5.00, adding them to
the $28.57 stock price (dividend/yield: $1.00/3.5% = $28.57) at the end of Year 5, which equals $33.57, and
dividing that by the beginning price of $40.00. Subtract one from your result and multiply by 100 to get a
percentage change [($33.57/$40.00)-1]x100= -16.1%.
Scenario 2: Dividend increases 5% per year, yield increases 25 basis points (one-quarter percent) per
year
Stock Price
Dividend
Current
(Dividend/
Total
Rate
Yield
Yield)
Return
Year 1
$1.00
2.50%
$40.00
Year 2
$1.05
2.75%
$38.18
Year 3
$1.10
3.00%
$36.75
Year 4
$1.16
3.25%
$35.62
Year 5
$1.22
3.50%
$34.73
0.6%
The 0.6% total return is calculated by taking the sum of all the annual cash dividends, $5.53, adding them to
the $34.73 stock price (dividend/yield: $1.22/3.5% = $34.73) at the end of Year 5, which equals $40.26, and
dividing that by the beginning price of $40.00. Subtract one from your result and multiply by 100 to get a
percentage change [($40.26/$40.00)-1]x100=0.6%.
Scenario 3: Dividend increases 5% per year, yield remains unchanged
Stock Price
Dividend
Current
(Dividend/
Total
Rate
Yield
Yield)
Return
Year 1
$1.00
2.50%
$40.00
Year 2
$1.05
2.50%
$42.00
Year 3
$1.10
2.50%
$44.10
Year 4
$1.16
2.50%
$46.31
Year 5
$1.22
2.50%
$48.62
35.4%
The 35.4% total return is calculated by taking the sum of all the annual cash dividends, $5.53, adding them to
the $48.62 stock price (dividend/yield: $1.22/2.5% = $48.62) at the end of Year 5, which equals $54.15, and
dividing that by the beginning price of $40.00. Subtract one from your result and multiply by 100 to get a
percentage change [($54.15/$40.00)-1]x100=35.4%.
1
The examples used throughout this report are hypothetical and do not represent the return available on any particular
investment.
Page 7 of 11
Why invest in stocks?
stable or declining interest rate environment
(Scenario 3).
Building wealth requires patience
Many investors are concerned about the volatility of
stocks and the possible risk to investment principal
along the way. Accumulating shares at regular
intervals (e.g., monthly) over time, with the same
dollar amount each time, as opposed to the outright
purchase of an entire position, is one way of
potentially reducing some of the risks of incorrectly
timing a purchase decision. This practice, known as
dollar cost averaging, can help reduce the need for
accurate market timing.
To illustrate how difficult it is to time market
fluctuations correctly, and therefore why patience is
so essential to long-term investment success, we
examined what would have happened if an investor
had been out of the market during some of the bestperforming days over the last 20 years. The average
compound annual total return received by an
investor in the S&P 500, with dividends reinvested
over the entire 20-year period from 1993 through
2012, would have been 8.2%. Had that investor
missed the 10 and 20 days that the S&P 500 turned
in its highest returns during that period, the average
compound annual total returns would have been just
4.5% and 2.1%, respectively. Missing the market's best
30 and 40 days doomed the investor to average
compound annual total returns of 0.0% and -2.0%
respectively. A summary of these results is
presented in Figure 4.
It requires patience to buy and hold. But that
strategy, when devoted to stocks of good quality
companies, has frequently yielded results superior
to one of trading in and out of the market.
(Dollar cost averaging does not ensure a profit or
protect against a loss in a declining market. You
should consider your financial and emotional ability
to continue the program in both up and down
markets).
Figure 5 helps to put into perspective how seldom
large company stocks (represented by the S&P 500)
have generated negative returns during various
holding periods. For example, since 1926 there have
2013
been only 12 five-year periods (out of 83 total, or just
14%) in which the S&P 500 had a negative total
return, or lost an investor money; most of which
occurred in the 1930’s (4) and in the decade just
completed (5), including the five year period ended
12/31/2011 (-0.3%).
Most investors who have built significant wealth by
participating in the stock market have achieved
this success over years and years of patient
investing. The stock market provides a way to own
a piece of the companies that provide our goods and
services, and a way to participate in the decisions
managements make about these companies. Just as
companies do not prosper overnight, most stocks do
not go up dramatically and create significant
investment value overnight either. Many investors
like to get paid while waiting for the market to
reflect a company's progress. Fortunately for such
investors, many companies pay shareholders a
portion of their earnings, usually quarterly, in the
form of dividends.
Stocks that can potentially stand the test of time
We think that to be successful in the stock market it
makes sense to emulate the techniques of great
investors, such as Warren Buffett and John
Templeton, by adhering to a formula of:
 selecting good quality companies with solid
prospects for future growth,
 accumulating shares over several weeks, months
or years according to a disciplined, regular
schedule– adding to positions if the shares pull
back and provide an attractive buying
opportunity, and
 patiently holding onto the shares year after year,
monitoring the companies' progress, selling only if
something of a materially negative nature occurs at
a company.
Diversification is also critical to modifying portfolio
risk over time. In addition to stocks, a wellconstructed portfolio may also contain other asset
classes. Figure 6 provides some guidelines that
should help investors who wish to build a welldiversified portfolio of common stocks.
Page 8 of 11
Why invest in stocks?
2013
Figure 4 - Market timing: the risk of missing major opportunities
8.22%
4.53%
2.08%
-0.02%
-1.94%
Invested All Missed 10
Days
Best Days
Missed 20
Best Days
Missed 30
Best Days
Missed 40
Best Days
Sources: FactSet, Wells Fargo Advisors
Figure 5 – Summary of returns for different holding periods (nominal terms 1926-2012)
Number
of Periods
1 Year
87
5 Years
83
10 Years
78
15 Years
73
20 Years
68
Times Equities
Outperformed
Fixed Income
Number
Percent
53
61%
58
70%
59
76%
63
86%
61
90%
Times Equities Had
Negative Returns
Number
Percent
24
28%
12
14%
4
5%
0
0%
0
0%
Sources: Morningstar, Wells Fargo Advisors
*Please see the bottom of page 1 for descriptions and disclaimers. Past performance is no guarantee of future results.
Figure 6 – Diversification guidelines
A properly diversified portfolio should include:
• Roughly 20 to 30 stocks
• Representation from at least six to eight sectors with different investment characteristics
• No more than 20 percent of the total portfolio value in any one sector
• No more than 10 percent of the total portfolio value in any one stock
• A minimum of approximately 3% to 4% of the total portfolio value in each security.
Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.
Page 9 of 11
Why invest in stocks?
What stocks should I buy?
The first step in any investment-planning process is
one of self-examination. Defining one’s financial
goals, and how much risk can be tolerated along the
way, is crucial at the outset. Once an investor has
determined if the primary investment objective is
for income, growth, or some combination; he or she
can evaluate the risk that accompanies owning
aggressive stocks versus conservative stocks.
2013
Stocks included in several Wells Fargo Advisors
investment strategies presented in Figure 7 may be
suitable for an investor's temperament or comfort
level. Our Diversified Stock Income Plan (DSIP) and
Core Stock Investment Plan, in particular, identify a
number of stocks we consider appropriate for longterm investors. Investors desiring more information
on specific stocks should contact their financial
advisor, who can help determine which stocks may
be appropriate additions to their portfolio.
Figure 7 – Wells Fargo Advisors investment strategies
Diversified Stock Income Plan (DSIP): The Diversified Stock Income Plan is a closely monitored list of
stocks chosen because of the likelihood of the companies to consistently raise annual dividends. Our goal is
to find stocks with attractive current yields that have the potential to provide a growing stream of income
over time, while taking into consideration company fundamentals and valuation. With a package of such
stocks, we are seeking a relatively low risk way to help conservative income and growth-oriented equity
investors to potentially keep up with the rising cost of living.
Core Stock Investment Plan: The Core Stock Investment Plan is designed for those who aspire to build
wealth by holding long-term investments (three to five-plus year time horizon) in industry-leading
companies. Our objective is to offer you the opportunity to invest in businesses that we believe can stand
the test of time.
High Yield Equity Income List: Designed with a time horizon of approximately 12 months, the High Yield
Equity Income list seeks to emphasize companies that pay notably higher dividends than the broader
market (as measured by the S&P 500), with expectations of reasonable long-term capital appreciation and
reasonable risk.
Dynamic Growth List: Designed with a 12-month investment horizon, the Dynamic Growth list focuses on
companies that offer above average growth potential, and may be on track to become leaders in the markets
they serve.
Focus List: The Focus list is a recommended portfolio of 25 individual stocks, equally weighted at 4% each,
with an intermediate (9-12 month) timeframe. The individual stocks are chosen based on their fundamental
outlook (“bottom-up”), within a framework of recommended sector weightings (“top-down”) from Wells
Fargo Advisors Equity Strategy team.
Please contact your Wells Fargo Advisors financial advisor if you would like more information on any of the
investment strategies listed above.
Page 10 of 11
Why invest in stocks?
2013
Disclaimers
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

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Dividends are not guaranteed and are subject to change or elimination.
Standard deviation measures the dispersion of a set of data from its mean. The more spread apart the
data is, the higher the deviation.
S&P 500 Index is a market capitalization-weighted index, composed of 500 widely held common stocks
that is generally considered representative of the US stock market.
An index is not managed and is unavailable for direct investment.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than
other investments. An investment in the stock market should be made with an understanding of the
risks associated with common stocks, including market fluctuations. Investing in fixed income
securities involves certain risks such as markets risk if sold prior to maturity and credit risk especially if
investing in high yield bonds, which have lower ratings and are subject to greater volatility. Bond prices
fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the
decline of the value of your investment. All fixed income investments may be worth less than original
cost upon redemption or maturity. . Government securities, unlike stocks and bonds, are guaranteed as
to payment of principal and interest by the U.S. government if held to maturity.
Additional information available upon request. Past performance is not a guide to future performance. The
material contained herein has been prepared from sources and data we believe to be reliable but we make no
guarantee as to its accuracy or completeness. This material is published solely for informational purposes
and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product.
Opinions and estimates are as of a certain date and subject to change without notice.
Wells Fargo Advisors is a broker/dealer affiliate of Wells Fargo & Company; other broker/dealer affiliates of
Wells Fargo & Company may have differing opinions than those expressed in this report.
Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value
Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, nonbank affiliates of Wells Fargo &
Company.
©2013 Wells Fargo Advisors, LLC. All rights reserved.
CAR # 0413-03040
Page 11 of 11