TBO.com - TBO is Tampa Bay Online

5 Good Reasons Stocks Remain Attractive

ADVERTISEMENT

The Tampa Tribune

Published: January 27, 2008

Investors weren't at their finest Tuesday. A tsunami of selling drove the Dow Jones average down 464 points, only to bounce back and end the day off 128 points. Big rises and falls continued through the week.

Clearly, many folks were rattled. Looking to maintain your investment sanity? Breathe deeply, keep these five maxims in mind - and start buying stocks.

Sitting pretty. Unless you're invested 100 percent in stocks, you haven't suffered the full brunt of the market decline.

Suppose you have a classic balanced portfolio, with 60 percent in stocks and 40 percent in bonds. Although the Dow industrials are off about 10 percent in 2008, your portfolio might have lost just 5 percent. That stings, but it's hardly cause for panic.

Moreover, the recent decline comes after five years of healthy gains. In fact, shares in the Standard & Poor's 500-stock index are still up 69 percent since the October 2002 market low.

Remember, over the past five years, U.S. small-company shares and foreign stocks have easily outpaced the blue-chip stocks in the S&P. The bottom line: Despite the recent carnage, you are likely sitting on handsome profits.

Hitting bottom. A bear market is often defined as a 20 percent decline in stock prices. As of Tuesday's close, the S&P 500 was down 16 percent from its Oct. 9 peak. In other words, if this turns out to be a standard bear market, the pain is almost over - and there isn't much point in bailing out now.

Of course, this could become far worse than your standard bear market. Investors still vividly recall the brutal decline earlier this decade, when the S&P tumbled 49 percent from its March 2000 peak to its October 2002 trough.

This sort of multiyear losing streak is, however, relatively rare. Since year-end 1925, we have had only four such losing streaks, 1929-32, 1939-41, 1973-74 and 2000-02, according to Ibbotson Associates, a unit of Chicago investment researcher Morningstar.

Beating bonds. If you think stocks are unappealing, check out bonds and money-market funds.

As of Tuesday's close, the benchmark 10-year Treasury note was yielding a modest 3.5 percent. That is a miserably low yield to lock in for the next 10 years - and today's buyers may be left with little or no gain, once taxes and inflation take their bite.

Meanwhile, taxable money-market funds have been paying about 4 percent. With the Federal Reserve pushing down short-term interest rates, yields could fall sharply in the months ahead.

In fact, if you are an income-hungry investor looking for some inflation protection, stocks are arguably the best choice. For proof, compare the S&P to inflation-indexed Treasury bonds.

Today, you can but 10-year inflation-indexed Treasurys, garner a 1.3 percent initial yield and see your interest payments rise along with inflation.

Yet if you want a rising income stream, the S&P seems a far better bet. True, it doesn't come with a government guarantee. But you have a higher initial yield, currently 2.1 percent, and there's a good chance your income will outpace inflation. During the past 50 years, the dividends kicked off by the S&P companies have risen at 5.6 percent a year, comfortably ahead of the 4.1 percent inflation rate.

Staking claims. Most investors buy stocks not for income, but for capital gains. At times like this, price appreciation can seem utterly fickle, but over the long haul, shares should post handsome gains because they represent a claim on corporate profits.

Buying cheap. The further stocks fall, the riskier they seem to investors. But the decline really makes stocks less risky because they are now a better value.

Think of it this way: If the S&P is any guide, your fellow investors are saying U.S. corporations are worth 16 percent less than they were three months ago. A slowing economy means corporations probably are worth a little less. But surely they aren't worth 16 percent less.

Share this:

Loading Comments...

Email Print

ADVERTISEMENT