I don\u00b4t know whether you have noticed, but something happened on the stock markets this week.<\/p>\n
Take the DAX Total Return, a well-constructed index (unlike the Dow Jones).\u00a0 The index had been hitting a ceiling at 6300 points a number of times this year but never managed to get through.\u00a0 This week, we have passed 6400 points for a couple of days now.\u00a0 This might be a sign that it is time for you to invest your money in stocks.<\/p>\n
Last time the DAX reached 6400 points, this was in early September 2008, more than 2 years ago, before the Lehman disaster was announced. \u00a06400 points were also reached in early 2007, while the DAX was on its way to a high of 8000 points reached only 6 months later.\u00a0 Before that, you had to go as far back as February 2001 to see the DAX at 6400 points, on its way down to a low of 2200 points reached in March 2003.<\/p>\n
Does that mean that the DAX could hit 8000 points soon?\u00a0 I don\u00b4t know.\u00a0 And nobody knows, really.\u00a0 The only thing that I know is that the DAX has been at 8000 before: in March 2000, July 2007 and December 2007.\u00a0 So getting there once more is not impossible.\u00a0 Some say that as the DAX performance has been rather disappointing on a 10-year period basis (2000-2010: the lost decade for stocks?), the index has some catch up to do.<\/p>\n
The DAX Total Return index was launched on 31.12.1987 at 1000 points.\u00a0 Assuming 6500 points at end 2010, this gives a CAGR of 8.5%.\u00a0 Assuming 8000 at end 2010 would give a CAGR of 9.5% over the period, so only 1% point more.\u00a0 This does not sound too crazy.\u00a0 Take the S&P 500 Total Return index as comparison.\u00a0 The index has grown from 274 points on 31.12.1987 to 1837 points at 31.12.2009, giving a CAGR of 9.6%.\u00a0 So a DAX at 8000 sounds quite reasonable from that perspective<\/p>\n
The DAX P\/E is also currently rather low at about 10.\u00a0 As comparison, the average P\/E of the S&P 500 between 1871 and 2009 was 16, and the average between 1991 and 2009 was 27.<\/p>\n
Turn it on its head and look at the dividend yield: current dividend yield of the MSCI Europe is at 3.4%.\u00a0 Between 1985 and 2010, the dividend yield of the MSCI Europe has broadly remained between 2% and 4%, and even reached 6% in 2008.\u00a0 So at 3.4% you are making more money on the dividend yield alone than on treasury bonds.\u00a0 And some high dividend yield stocks have much higher yields.\u00a0 Deutsche Telekom currently has a dividend yield of 7% for example.<\/p>\n
At the end of the day, the level of the DAX is the result of supply and demand for the equity of the companies that make the index. \u00a0Supply has been rather limited, with very few IPOs in the last 2 years and a number of share buy-backs. \u00a0Demand has been low since the beginning of the financial crisis, with huge amounts of cash hoarded in treasury bonds, money market papers and savings accounts.\u00a0\u00a0 The interest rates you get on this kind of investment are currently rock bottom (well, close to 0% actually).<\/p>\n
So it would not take much for people to realise that they are better off buying shares on short to medium term perspective.\u00a0 The \u201creward profile\u201d is currently asymmetric:\u00a0 risk is limited, and return could be high.\u00a0 Imagine the DAX at 8000 at end 2011:\u00a0 this would give you 25% return over the next 15 months!<\/p>\n
So what should you buy?\u00a0 If you like all share funds, go for Carmignac Investment A (ISIN FR0010148981) for example.\u00a0 Its performance has been great over 3, 5 and 10 years. If you like to mix shares with bonds to sleep better at night, go for Carmignac Patrimoine A (ISIN FR0010135103).\u00a0 Also great performance over 3, 5 and 10 years. More info can be found there: www.carmignac.fr.<\/p>\n
So time to get out of boring savings account and treasury bonds!<\/p>\n","protected":false},"excerpt":{"rendered":"
I don\u00b4t know whether you have noticed, but something happened on the stock markets this week. Take the DAX Total Return, a well-constructed index (unlike the Dow Jones).\u00a0 The index had been hitting a ceiling at 6300 points a number… <\/p>\n