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Bonds / Stocks That Pay Dividends

With so much turmoil and uncertainty in the U.S. economy, and even more fear of collapse overseas, do you ever recommend just getting out of the stock market all together and hunkering down with something safer like bonds?

January 28, 2012

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I never recommend getting out of the stock market entirely--or even making major changes to your allocation to stocks. The stock market is so unpredictable that if you bail out, the risk is very high that you will miss a significant upturn. Moreover, even if you make the right call to get out of the market, you then have to muster the courage to get back in. For example, I have a couple of friends who are very proud of the fact that they got out of stocks before the market crash in October 1987. The problem is that they’ve never gotten back into stocks and they’ve missed out on the huge run since then--the S&P 500 is currently nearly 400% from its pre-crash 1987 high. I strongly believe that the only way to participate in the long-term gains that stocks provide is to put as much money in the market as you can while still being able to sleep at night, and then leave it there.

Moreover, it is important to note that bonds are not as safe as they seem, especially right now. If interest rates go up--and they can’t go much further down--bond values will fall. And depending on the type of bond, the value could fall a lot. I’m not saying you shouldn’t own any bonds. I believe every investor should hold a mix of stock and bonds--and other assets--that is appropriate for their risk tolerance and their long- and short-term financial needs.

(Question submitted by Marvin S.)

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Where Are the Customers' Yachts?

This headline could easily apply to Goldman Sachs today, as recently described by former employee Greg Smith. Actually, it is the title of a book written in 1940 by a former Wall Street employee named Fred Schwed, Jr. The title refers to a story about person admiring the yachts owned by bankers and brokers who asks where the customers' yachts were. Of course, the customers, who had dutifully followed the advice of the bankers and brokers, couldn’t afford yachts. This just goes to show that there is nothing new about the attitude that Goldman Sachs employees were purported (probably accurately) to have about their clients. It was just as true in 1940--and likely has been forever--as it is now.

The stocks of a number of “green” companies have soared and then crashed and burned over the past year or two. This is particularly true in the solar energy field. For example, Energy Conversion Devices saw its stock climb above 80 in mid-2008. But the company’s results never justified the lofty valuation, and it ended up filing for bankruptcy on February 14 of this year. The stock has fallen to 0.16, and it is probably overpriced even at that level. Read More.

Don't Chase the Headlines

The recent unfortunate accident involving the Costa Concordia cruise ship, which is owned by a subsidiary of Carnival Corp., raises an important investing question: Should you bail out of a stock if the company is affected by a serious negative event? Unless the event could be part of a series or trend, the answer is usually “no,” for two reasons.

We’re not at all sure that either Greece’s or Europe’s troubles are truly behind them. But that said, we also believe that it makes sense to have some European exposure in your portfolio. The advice we gave in the November 2011 issue still holds...

There are certainly good opportunities in foreign turnarounds, but also very significant risks as well. The market inefficiencies that provide unusually high return potential for turnarounds here in the U.S. are probably even greater in foreign markets. However, there may be special, local features that affect foreign companies that we may not understand when we view them from afar.

Ask George

With so much turmoil and uncertainty in the U.S. economy, and even more fear of collapse overseas, do you ever recommend just getting out of the stock market all together and hunkering down with something safer like bonds?

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AskGeorge

Now that Greece's latest bailout is complete, is it safe to buy European stocks again?

With so much turmoil and uncertainty in the U.S. economy, and even more fear of collapse overseas, do you ever recommend just getting out of the stock market all together and hunkering down with something safer like bonds?

What is your opinion on investing in foreign turnaround companies?

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