Investing is temporarily being written by guest columnists.
With stock prices up more than 20 percent annually since the start of this decade, it's easy to forget that investing isn't just about making money. In fact, it's also about preserving the wealth we've already acquired--a point worth remembering at the stock market's current levels. "When valuations reach these heights, it's time to start protecting your principal," said Jim Stack, editor of the financial newsletter InvesTech in Whitefish, Mont.
Stack's brand of caution remains rare, even after the recent shakeout in the technology sector. Most financial advisers these days preach the gospel of growth, urging investors to stash most or even all of their savings in stocks or funds that aim for inflation-beating capital gains.
But virtually every investor should hold some stodgier investments as the bedrock for a long-term portfolio. Such investments often provide a dose of income, so you generally earn at least a modest return on your holdings. And stable, income-oriented investments can deliver much-needed diversification during market downturns. Without such holdings, a 30 percent nose dive in the stock market (there have been 10 of them since 1926) might suddenly put a severe dent in your net worth.
You may have to search a bit harder than our parents did to find the low-risk investments you need. Years ago, brokers often pitched certain stocks and bonds as perfect investments for widows and orphans. The idea was that customers could count upon those investments for stable returns, often through regular dividend payments. Growth? That was largely for speculators.
Today's investors turn up their noses at such offerings, in part because expectations have soared along with the stock market. As a result, few brokers are pushing investments primarily designed to preserve principal. The brokers figure investors aren't interested--and in many cases they're right.
Meanwhile, yesterday's widows-and-orphans investments carry new forms of risk. Take stocks of utility companies. Those firms once operated as regional monopolies that pumped out steady dividends and offered little growth. Deregulation introduced competition into the industry, and now many utilities use their cash to invest in growth-oriented operations such as cellular services or broad-band cable for Internet access. The upshot: Many utility stocks act like the growth-oriented issues they are.
Similarly, once-staid banks and other financial institutions now compete fiercely for customers. As a result, shares of many banks--the likes of Citigroup Inc. or Bank of America Corp.--are now growth stocks trading at high valuations. Such shares carry considerable risk in a market downturn.
Stakes of blue-chip companies were another safe haven for our folks. Leading firms such as International Business Machines Corp., General Electric Co. and Ford Motor Co. generated steady earnings growth while offering dividend yields. But competition amid new opportunities in the United States and abroad threaten such firms' stability. Consider IBM's history during the past decade: The stock rose as high as $34 in February 1991, fell to $10.25 in August 1993 and has since climbed to $124. Meanwhile, the dividend yield has fallen to a minuscule 0.4 percent. Growth, yes. Stability and income, no.
Even bonds aren't the havens they once were. Fluctuating interest rates and an increased volume of lower-quality bonds have left even fixed-income investors vulnerable to significant losses.
Clearly, widows and orphans need a new set of investment options. The same goes for any investors looking to preserve some of the wealth they've gained in the financial markets' long upswing. Here are four places to look, with some examples of what you might find:
Stocks that still pay dividends. The S&P 500's dividend yield recently stood at a mere 1.25 percent, considerably lower than its 4.26 percent average over the past 70 years and its 4 percent level at the start of this decade. Apparently, investors figure they don't need the protection that dividends historically provide.
But that protection can be vital. Geraldine Weiss, editor of Investment Quality Trends in La Jolla, Calif., points out that dividends have delivered almost half of stocks' total return since 1926. Without that cushion, investors have to rely on capital gains to do the whole job.
What's more, higher dividend income means less volatility. A study by Pioneer Funds recently found that during the five years through 1998, the 100 highest-dividend-paying stocks in the S&P 500 were 44 percent less volatile than the 100 lowest yielders.
Where do you find reliable dividends today? A few pockets of the utilities industry are still relatively safe for conservative investors. Ed Killen, manager of Berwyn Income Builder (1-800-824-2249; $10,000 minimum investment; no load), likes stocks of selected companies in natural gas distribution, including Laclede Gas Co. (LG; Friday closing stock price, $22.18 3/4; recent yield, 6.0 percent), AGL Resources Inc. (ATG; $18.18 3/4; 5.9 percent) and MCN Energy Group Inc. (MCN; $18.37 1/2; 5.5 percent).
Real estate investment trusts (REITs)--stocks of various companies that invest in real estate properties--often pay generous dividend yields. REITs aren't without risk, but they tend to zig when large-company stocks zag, providing significant diversification benefits.
Among REIT funds, Christine Benz of the mutual fund tracking company Morningstar Inc. likes the Morgan Stanley Dean Witter Real Estate Fund (1-800-869-3863; $1,000 minimum; 5.25 percent load). It holds shares of REITs that invest in malls with high sales per square foot and in office buildings and apartments with rising rents and occupancy rates.
The fund's manager, Douglas Funke, currently holds REITs such as Avalonbay Communities Inc. (AVB; Friday close, $35.12 1/2; recent yield, 5.8 percent), which invests in apartment buildings on the West and Northeast coasts and along the Mid-Atlantic seaboard. He also holds shares of Chateau Communities Inc. (CPJ; $29.25; 6.4 percent), which owns and operates manufactured-home communities.
The value patch. Most investors today are happy to pay premium prices for shares of firms that promise rapid earnings growth. Value investors, by contrast, look for a margin of safety--something that will protect them if promises aren't met.
Tweedy, Browne American Value (1-800-432-4789; $2,500 minimum; no load; three-year annual return, 21.52 percent) has done a good job finding stocks that offer such safety. It has been less volatile than its peers while delivering superior gains.
American Value manager Chris Browne has been finding good values among food service companies, large banks, and pharmaceutical firms. "There's no way of telling which technology companies will be on top 10 years from now," he said. "But people will always need to eat, take medicine and keep their money somewhere safe." His favorites include Johnson & Johnson (JNJ; Friday close, $102.18 3/4; recent yield, 1.1 percent) and American Express Co. (AXP; $145.62 1/2; 0.6 percent).
Bonds. The simplest and safest way to invest in bonds is to stick with high-quality intermediate-term issues--maturing in roughly three to seven years--or funds that hold them. Sarah Bush of Morningstar likes Fremont Funds' Bond Fund (1-800-548-4539; $2,000 minimum; no load) or Harbor Bond (1-800-422-1050; $2,000 minimum; no load). Bill Gross, named Morningstar's manager of the year for 1998, runs both portfolios.
Not too exciting, huh? Oh, well. The markets can offer far worse pain than a moderate dose of boredom. Just ask the guy who bought Amazon.com at its peak last spring.
Clint Willis is a freelance writer who writes about personal finance topics.