Five lessons from the meltdown

BOSTON -Stocks always rise over the long haul. Bonds are for retirees and investors with little taste for risk. Companies rarely cut their dividends.

Those are three of the long-followed rules of investing – and rules that, as investors learned during a year of the stock market’s worst turmoil since the Depression, can’t always be counted on.

The new rules: Bonds may be the better long-term bet. Diversifying means more than just picking different types of stocks. And nothing, including the humdrum money market fund, is risk-free.

Investors and advisers have begun to question the time-honored strategies of the longest investing binge in American history, dating to the start of a bull market in 1982. Here are five examples of how the year after the meltdown has changed the old thinking about investing.


Conventional wisdom: Safe investing means adjusting the mix of stocks and bonds in a portfolio based on an investor’s age and appetite for risk. Younger investors were advised to own more growth stocks, then transition as they aged into more shares of well-established, blue-chip companies and into bonds, which return less but are less risky. Stocks were expected to beat bonds handily over the long haul.

New thinking: A broad measure of the bond market, the Barclays Capital U.S. Aggregate Bond Index, is up nearly 14 percent since October 2007. That compares with a 28 percent decline for the Standard & Poor’s 500 stock index.

Going back five years, to well before the recession, bonds still win. You have to measure back 20 years to find a long-term edge for stocks, and even then it’s small. But bonds also may face headwinds in a few years. Deficit spending by the federal government may ignite inflation and drive interest rates higher, which would depress the price of bonds.


Conventional wisdom: You should diversify your stock portfolio to protect yourself in bear markets and get the best returns in bull markets. In downturns, count heavily on “value” stocks – those considered cheap compared with historically steady earnings. To take advantage of good times, own more volatile “growth” stocks – those expected to have rapidly growing earnings.

New thinking: The dramatic stock rally since March suggests a slowdown is inevitable and that it’s time to move more into value stocks. But a robust economic rebound could reignite the rally, meaning growth stocks would provide the best chance for big returns.

It all depends on what type of economy emerges. Typically, the economy will grow at least for several years after a recession. But this time, Americans are hesitant to spend because of the high unemployment rate and the lasting effects of the housing bust. Experts say to expect more volatility in the economy – a choppy recovery, not a steady upward climb. That makes any broad bets about which types of stocks will gain the most in coming months and years an unusually dicey proposition.


Conventional wisdom: Keep stocks and bonds as the foundation of your portfolio and put minimal amounts in other types of assets.

New thinking: Put more of your retirement nest egg in tangible assets. Think not only about your home but also about other kinds of real estate, as well as gold bullion, said Dan Deighan of Deighan Financial Advisors of Melbourne, Fla.

Many investors have turned to gold and real estate as hedges against stock market downturns, higher inflation and a weakening U.S. dollar.


Conventional wisdom: Stocks that pay dividends ensure you a steady stream of income.

New thinking: Dividends are being cut at a record pace. During the five decades before last fall’s meltdown, about 15 companies increased their dividends for every one that cut, according to S&P. So far this year, dividend cuts are running ahead of increases. The total cut so far this year by S&P 500 companies – $47.4 billion – already tops the full-year record of $40.6 billion set last year.


Conventional wisdom: Some investments are risk-free. You can put money in them and not worry whether it’s safe.

New thinking: There is no such thing as risk-free. At the height of the financial crisis, one large money market mutual fund, the Reserve Primary Fund, exposed investors to losses because the fund bought debt of Lehman Brothers, which went bankrupt. It was just the second instance of a money fund “breaking the buck,” or falling below $1 a share, in the past four decades.

New rules will restrict the investments money funds can make and lower the risk. But they come at a cost. Money funds are averaging yields of less than one-tenth of 1 percent – barely better than cash.