Most of the investors I work with want stocks that are safe. But what does safe really mean in the context of investing? On a practical level there is no such thing as a safe stock.
Investors are becoming less patient about the low yields available from money market instruments, CDs, and short-term bonds. Adjusted for inflation and taxes, these ‘safe’ investments are losers. Even the 10 year treasury bond, at 2% yield, is a loser on a net real basis.
So investors are increasingly turning to stocks for growth and profits. But stock prices are volatile, and that risk worries many investors, especially retirees who are usually not in a position to withstand big swings in the value of their portfolios.
The Dow Jones Industrial Average hit an all-time high on October 9, 2007, reaching 14,164.53. By March 2, 2009, the Dow bottomed at 6763.29, a peak-to-trough (drawdown) drop of -54%. That memory haunts investors, which is why many dropped out of the market.
On Tuesday, March 13, 2012, the Dow finally managed to close above 13,000. The NASDAQ closed above 3,000 for the first time since 2000. And the S&P 500 hit 1400 for the first time since 2008.
On February 2, 2012, USA Today quoted three “super bears,” Harry Dent, Gerald Celente, and Robert Prechter, as predicting “economic devastation ahead.”
Near term, the economy looks like it’s on the mend. GDP is growing by a little more than 2 percent, car and truck sales are strong, chain store sales are up, and consumer confidence is rising. Job numbers are improving; the European sovereign debt crisis has been handled, at least for now.
What worries investors? The uncertainty surrounding the election and tax policy, growth in U. S. debt levels, rising oil and fuel prices, and the Middle East…always the Middle East.
China recently announced a growth target of 7.5 percent for 2012, easing back from the more torrid growth rates of the past. The Chinese workers’ share of national income is rising, and that could fuel increased domestic consumption. The Wall Street Journal opines that this is “good news” for American soybean farmers, airplane manufacturers, apparel designers, and medical equipment engineers.
Retirees and near-retirees worry about increasing inflation, rising prices for things that they buy frequently—food, fuel, health care premiums, and medical services. Shadow Government Statistics, a group that exposes the flaws in governmental reporting, notes that the cost of maintaining a constant standard of living is rising by more than 10 percent per year. That doesn’t get headlines, but it may be the biggest risk of all.
So what’s an investor to do? As always, diversify your nest egg by investing in several different kinds of assets that don’t move up and down in concert. That means bonds (we recommend no more than a 20% exposure at this time), stocks (30% U.S. and 30% emerging markets), commodities (5%), REIT (5%), and cash (10%).