By: Ronald D. Struck
July 22, 2002
WHERE
DO I PUT MY MONEY – STOCKS OR BONDS?
Wow,
what a question. It's the
current hot topic in the investment market.
It's all the Wall Street Journal and the financial gurus on TV
talk about. And, there is
absolutely no agreement about what the market is going to do.
Choose whether you think it will go up or down and you can find
an "expert" somewhere who will support that view.
Like
a majority of people, I am both conservative and cautious.
I am skeptical anytime I see "easy" money being made.
It's the trait that got me in trouble with the vice-chairman of
a S&L for which I was the CFO.
He had an approach he thought would be a sure way of making
easy money. I thought he
was kidding himself and exposing the S&L to significant risks.
I'll let what eventually happened to the S&L vindicate my
conservative and cautious trait.
The vice-chairman prevailed with his views, I left the S&L,
and it was closed by the regulators a year later because of the
vice-chairman’s investment strategies.
I
personally have been pessimistic about the stock market for four or
five years now, telling anyone who asked that I didn't see any way
that it could hold up. But,
the bubble had more power than I realized, the DOW kept going up, and
people told me I was always too pessimistic.
But, I started giving these views when the DOW was around
10,000. Back then, I was
90/10 confident that the market was going to fall.
The DOW kept going up to around 11,000.
But, the bubble finally did burst and now it has fallen 25 or
30%.
What's
going to happen now? I
think it still may fall more, but now that it has already fallen so
much, my confidence level is only 51/49.
But, for short term trading, I would avoid stocks because I
think the new CEO/CFO financial certifications that will be required
of almost 1,000 public companies on Aug 14th make the market very
dangerous. It's probably
one of the key reasons the stock market is having such trouble right
now.
But,
as a long-term investor (a five or ten year time horizon), current
stock levels do not present as much downside risk.
The big question is - how long will the bottom last.
While the DOW may be much lower for an extended period, I think
it will take YEARS for it to ever get above 10,000 again, or to have
any significant rallies for that matter.
A
major point to consider is that we Americans don't have some sort of
magic potion that protects us from down markets that other countries
don't have. In the
1980's, the world was very impressed with how brilliant Japanese
business people were. Their
Nikkei (the Japanese version of the DOW) almost hit 40,000 in the late
1980s. Then their bubble
burst (theirs was real estate and bad banking, ours was the dot-com
industry), many of their biggest companies had major problems with
their accounting and financial records (sound familiar?), the Nikkei
fell to around 10,000, and it has been at that level for almost ten
years.
If we are
looking at the same possibility in the U.S., then the potential upside
returns available in the stock market may not be sufficient to
compensate for the risk exposure to downside movements.
Therefore, I would consider reducing investment portfolio risks
by reducing holdings in stocks (or stock mutual funds) and increasing
holdings in strong fixed-income securities (treasuries, agencies,
mortgage-backed securities, and select corporate bonds).
Who knows
if I'm right or not? But,
if I'm not right, you will only have an "opportunity loss,"
the additional earnings you could have made had you remained in
stocks, compared to the real earnings you make on fixed-income
securities. However, if I
am right and stock prices remain low for a long period of time, like
they have done in Japan, OR THEY GO DOWN EVEN MORE, your fixed-income
"real returns" will look pretty good compared to the
"opportunity losses" you avoided by not being in stocks.
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