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Stock Ideas Investors Daily Edge Over Exposure: It’s Not Just About The Sun
Stock Ideas Investors Daily Edge Over Exposure: It’s Not Just About The Sun 
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| Over Exposure: It’s Not Just About The Sun |
| Friday, 24 October 2008 | ||||||||
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A great broker who worked with me in the 90’s use to tell his clients, “If you can’t watch your account value drop 50%, without blinking, you can’t invest in stock. 80 to 90% of investors who own stocks have no business being in them.” Taken a look at your accounts lately? Your 401k/IRA, brokerage accounts? It’s not a pretty picture. For most people it’s much worse than it should be, even in this terrible market environment, for one reason; over exposure to stocks. Everyone, and I mean everyone, is over exposed to stocks. It seems to be a national fad, buy only stocks. We have been lulled into complacency about investing. Stocks have been so good for so long we have been allowed to think we can leave most or all of our money in this high-risk area. The results of this complacency are obvious now. Account values are plummeting and predictions range from 5-10 years before we see the markets back to previous highs. It didn’t have to be this way. We just got piggish. Of all the investment options, stocks have always had the highest, long-term rate of return. Long term is key. Stocks are not without huge costs and lots of very expensive potholes. They are down 66% of the time. It’s always easy for investors to understand this point when we are in a market like the one we have now. But, no one would listen for almost 20 years. It just looked so simple. You put $10 in, you turn the crank and $14 came out next month. Simple. For twenty years I have been telling investors to be realistic, don’t just invest in the stock market, you need bonds, too. They are what will level out your returns when the inevitable strikes. The inevitable has struck. This time, thanks to our congress, it was so out of the normal correction mode that we almost fell into the abyss. That’s another story.
For all of those 20 years, sound advice about diversifying into other investment classes was completely ignored. Ignored to the point that I stopped telling people to do it. I got tired of banging my head against the wall. Even people who have the mental discipline, the technical background and the available cash to invest in stocks, have too much in stocks. Even the pros were looking to hit the stock market lottery. Who got hit? A friend of mine, who is just over 60, just told me he has lost so much in the stock in his retirement accounts he might never be able to retire. This guy has always made a very good living and has faithfully contributed to his retirement accounts. He is not alone. The long-term effects of this disaster in the markets will be with the baby boomers for along time. The rules of investing are written in blood, our blood. No one, almost no one, would put all their money into one stock, that’s nuts. Virtually no one would invest in something they know nothing about, sight unseen. But almost everyone invests in one asset class, stocks, and then wonder why their savings has dropped 40%, 50% or even 75% when the market corrects. Maybe, just maybe, those of us who have some time left to shift gears and get our acts together before retirement will finally look at bonds. They will provide the stability needed to make it to retirement on something other than Social Security. But, if you can live on $1700 a month, why bother. Right now, investment grade corporate bonds are paying great total returns, some in the 30% to 40% range, with maturities as short as three years. And, you won’t have to dread looking at your account. Don’t you hate when that happens? Whatever you do, you must shift gears. You can’t continue to lock yourself into a strategy that leaves you completely exposed to market fluctuations. You don’t like corporates, how about tax-free bonds. They are even more secure than corporates. Investment grade corporate bonds have a default rate of .5%, or they pay off 99.5% of the time. Investment grade tax-frees are even more secure. One of the commentators on Squawk Box, on CNBC, recently said, “We might be better off after this experience.” Make a few simple changes in how you are doing things and you will be better off. Live to fight another day, and despite how things look now, there will be another day. Steve P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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