You Need Stocks, Not Bonds, To Rebuild Your Nest Egg

Of Course Your Retirement Funds Are Dented?
Three years ago stocks were it! The Dow was at an all time high. It was all about E-trading, hanging out in on-line chat rooms, stock tips at the water cooler, bragging about your winners. Everybody was feeling rich and thinking about early retirement. Not now! Perhaps you have had to postpone your retirement or totally rebuild your life. Maybe you did retire and now find you must return to work.

The Common Wisdom is Always Wrong
Right now most investors are convinced that bonds are the right path to success. They lost so much money in the stock market over the last two years that they are AFRAID of stocks. But that is wrong. In Q1 ’09, 2% of stocks were above their 200 day moving average of price on the New York Stock Exchange, the lowest extreme in my 45 years on Wall Street. Fear reined supreme. And then abruptly, the markets changed course. Everybody thought it was a head fake and most did nothing but sit on their hands. By the end of 2009, 92% of stocks were above those same averages, an equally extreme reading. Investors spent the whole year pulling money out of U.S. stock mutual funds even as prices recovered.

Now all the major firms with big ad budgets are trying to convince you to let them help you rebuild your nest egg with a balanced portfolio with lots of bonds, some stocks and cash. Those same firms were luring you into all stocks all the time at the Dow peak in 2007. Last I looked, cash is returning less than 1%. Ten Year Bonds are yielding about 3%. If you have lost half your money, you have to be up 100% to be even. If you have lost 30%, you need to be up 43% to be even. You can’t make it back with low yielding cash and bonds returning 1 or 2% a year in interest with just about a zero prospect of capital appreciation.

There is no question that volatility comes with owning stocks but stocks are the only way to rebuild your nest egg. Pick stocks with dividends that equal or far exceed what you will earn in a money market fund and also offer the promise of significant capital appreciation to the patient investor as the economy turns up. Be a contrarian and buy things that are out of favor with limited downside risk. Avoid the momentum stocks which are already up a huge amount and are overpriced.

Stock Market Cycles
Just as the sun rises in the morning and sets in the evening, the stock market goes up and down. Always has. Always will. In the mid-60’s when early in my career on Wall Street, Emmanuel Cohen was Chairman of the SEC. When asked what he expected of the market (then in the throes of a 35% decline) the Wall Street Journal quoted this reply: “The market has gone up in the past. It has gone down in the past. I expect it will go up and down in the future!” It’s all about Mob Psychology. Warren Buffett says “Be greedy when everyone is fearful.” To do so, you must be bold when you have a knot in your stomach. And sell when you feel giddy.

The Ocean as Metaphor for the Stock Market
I have a USCG Captain’s license. Those who spend time near the ocean can attest that the ocean demands respect. Sometimes it is like a lake and, at other times, it shows its fury in 30 foot waves, riptides, or undercurrents. That’s why there are lifeguards at the beach.

We have just experienced a two year 30 foot wave washing over our investments. It has reminded investors that stocks go down as well as up. On the other hand, nothing is better than to buy stocks of good companies when they have lost 50-90% of their value. Couple that with more realistic expectations of how much you can expect to earn on your portfolio. Over the first decade of this millennium, U.S. stocks provided no return at all. However, Very Long-term trends show an 8% return on stocks is a good goal. At the present time, that is more than twice what you will earn on a bond portfolio and eight times the return on cash in the bank or in a money market fund. You will not live long enough to rebuild your portfolio with gains of 2 and 3%! If inflation returns to those levels, such returns would leave you with no increase whatsoever in your current purchasing power.

Hire an Investment Advisor to be Your Lifeguard
In my view, our country is too great to go down for the count. We have serious issues to overcome but even as President Obama said in his first State of the Union address, we are not going to acquiesce and become a second rate nation anytime soon. Fear climaxed and the stock market turned in March ‘09. The wounds of severe losses are still raw for most Americans. They are afraid of stocks but they should really be afraid of bonds. I’ll tell you why in a separate article. Carefully selected stocks in a rifle shot, not a shotgun, approach will serve you best.

This is a market for investment professionals with gray hair who have lived through severe corrections in 1973-74, in 1987, in 1997 when Long Term Capital collapsed, in the collapse of the Tech Bubble in 2000-2003 and more recently in 2008-2009, and know how to act callmly in your behalf. Find a CFA so you know you are dealing with someone ethical and knowledgeable. Choose a first rate investment advisor to be the lifeguard of your retirement.

Our firm, Gramercy Capital Mgt., is one of 20 in the last two decades to have been ranked #1 in the Nelson’s Directory of Registered Investment Advisors for five year performance. You bet we’re proud of that! You need an advisor with our skills to help you establish realistic goals and let them steer your portfolio through the crosscurrents and extreme “surface noise” to the better days ahead.