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Investing Defensivley Does Not Mean Deserting Stocks

For investors, these are baffling times. The outlook for the economy and financial markets is so opaque that everyone seems to be predicting a different best- or worst-case scenario, and there are so many conflicting indicators that one notion may sound just as convincing—or as full of holes—as the next. But one thing isclear—individual investors really don’t like stocks. During the first seven months of 2010, a net $33.12 billion came out of stock mutual funds, according to the Investment Company Institute, while a net $185.31 billion surged into bond funds. And whereas two years ago, 401(k) investors had 70% of their assets in stocks, now the percentage is 57% and dropping, according to benefits consultant Hewitt Associates. 


There are plenty of reasons for this obvious distaste. An investment in stocks 10 years ago would be worth less now than when you made it, and if you had been prescient enough to get out of the market at its peak in 2007, you’d still be well ahead of the game, even after 2009’s historic rally. In mid-September 2010, the Standard & Poor’s 500 stock index was nearly 30% below where it had been three years earlier. And the stocks of solid, dividend-paying companies—which many analysts have praised as a relatively low-risk, income-producing alternative to bonds—could suffer if dividends are again taxed at rates for ordinary income (as high as almost 40% for top earners) rather than at the 15% rate that has applied to most payouts to shareholders for the past several years. That will happen in January 2011 unless Congress votes to change the law.

What the government does or doesn’t do during the next several months could help determine whether the shaky economy falls again into recession—and, by extension, whether the stock market goes into another tailspin. Unemployment remains stubbornly high, real estate values may be falling again after a short-lived, very tentative recovery, and consumers, whose spending accounts for the lion’s share of economic growth, are saving more as they begin to repay a mountain of debt. Additional government stimulus might help create jobs and spur spending, but most politicians, stung by the popular backlash against bank bailouts and the 2009 stimulus bill, seem much more focused on reducing the federal budget deficit. If tax increases and cutbacks in government spending result, strong economic growth may be almost impossible.

Perhaps the most likely scenario for the near future is that the economy and stock markets will muddle along, neither moving into full-fledged recovery mode nor collapsing again. And even amid the uncertainty, all of the time-tested reasons for owning equities still make sense. Corporate earnings have posted a brisk recovery during the past few quarters, and there’s a likelihood that the best companies will gain value over the long haul—just as they’ve always done. And putting too much faith—and money—into bonds or cash carries its own risks. Though bonds have done extraordinarily well the past few years, there’s now talk of a bond “bubble,” with an increasing possibility of sharp declines when the economy eventually picks up steam. Just as diversified portfolios fared better than those concentrated in stocks during the market crash in late 2008 and early 2009, having a substantial portion of your holdings in stocks now will help when bond returns inevitably retreat toward their historical averages.

Yet there’s a difference between knowing you should own stocks and feeling comfortable doing it, and unless you have several decades to go until you’ll need to tap your investments, just sitting tight and waiting out stocks’ rough patches isn’t necessarily the best strategy. So the real question may not be whether to hold equities but rather which ones to hold, how much of your portfolio to allocate to stocks, and how to minimize the damage if another bear market takes hold.
Even if tax rates on dividends rise, large companies with long records of maintaining or increasing payouts to shareholders—even during the stress test of the economic crisis—could continue to outperform many of their competitors. Meanwhile, economic growth in developing countries seems likely to keep outpacing the expansion in the United States and the rest of the developed world, though the volatility of investments in emerging markets may put off many risk-averse investors.

If you have questions about the economic and market outlooks—and about what defensive measures you could take to insulate your investments from ongoing turbulence—please call to set up an appointment.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.



INDEX
  • Six Tax Items For Small Businesses
  • Now Is A Perfect Time To Open A New Business
  • Do You Know If Your Business Really Is Small?
  • 4 Estate Issues For Business Owners
  • Self-Employed? Map Out Tax Details
  • 10 Easy Steps To Take If Opening A New Business
  • To Buy Or Not To Buy: That Is The Business Franchise Question
  • Ever Considered Helping Your Adult Child Open A Business?
  • Do You Know What Kind Of Business Not To Open?
  • Do You Plan To Move Your Business To A New State?
  • Dispel These 7 Popular Myths About Retirement
  • 4 Retirement Plan Options For Your Small Business
  • Are Stocks Overpriced And Forming A Bubble?
  • 4 Steps To Creating A Dynamic Business Budget
  • Can An Underfunded Small Business Startup Be Successful?
  • What Happens If You Have Excess Capital Losses?
  • This Is Not Granddad's 'Defined Benefit Plan'
  • Despite Much Pessimism, Slow Growth Persists
  • How To Take Your Section 179 Deduction To The Max
  • Squeeze More Out Of Bonus Depreciation Deductions
  • A Common Error In Powers Of Attorney
  • For The Self-Employed: 4 Retirement Plan Choices
  • Which States Are The Most Friendly To Businesses?
  • How Economic Myths Distort Investment Outlook
  • Don't Forget About Roth 401(k)
  • REITs: A Great Diversification Investment
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • The Twenty Top Tax Breaks In The New 2010 Tax Act
  • Investing Defensivley Does Not Mean Deserting Stocks
  • 401(k) Alternatives For Business Owners
  • Tax Court Okays Deducting Cost Of MBA
  • Employers Find Ways To Mitigate Liability On 401(k)s
  • Working Longer: What's A Post-Retirement Job Worth?
  • Slash Taxes By Swapping Like-Kind Assets
  • Transferring The Family Business To Your Heirs
  • Business Owners Get Big Tax Cuts In Recovery Act
  • Move Fast To Corral Emergency SBA Loans
  • Risk Management
  • Estate Taxes And The Obama Administration
  • Gifting A Business Can Cut Estate Taxes
  • A Little Bond Logic Yields Insights
  • Avoiding The IRA Rollover Crackdown
  • Ruling Cites Business Owner Responsibility to 401 (k) Plans
  • Ruling Cites Business Owner Responsibility to 401(k) Plans
  • How Much Is Your Business Worth?
  • Managing Cash Flow In Tight Times
  • When Times Are So Scary, Opportunities Emerge
  • Avoid Being Accused Of Insider Trading
  • Lifecycle Funds May Pose A Hidden Danger
  • Funding A Friend's Business Venture
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Small Business And Work Opportunity Tax Act
  • The Oil Patch Profit Squeeze
  • Free Credit Reports Available Online
  • Understanding the Importance of a Fiduciary Standard
  • Energy Systems Scale and Timeline
  • Timber As A Liquid Investment
  • Timber Facts
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Bank Loan Funds - A Primer
  • Ethanol: Salvation or Panacea?
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • A Primer On Managed Futures
  • Identity Theft: What Documents Should You Shred Or Store?
  • The Case For Industrial Metals
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • Know The Score
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Identity Theft: Everyday Prevention
  • Identity Theft : Help Is On Its Way
  • Identity Theft: Tips To Protect Yourself
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • Identity Theft: A Note About Social Security Numbers
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Exit Gracefully: How Business Owners Should Plan For A Comfortable Retirement
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • IRS Refuses Change Of Section 179 Election To Expense Depreciable Property
  • Small Businesses Need To Be Aggressive On Costs
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Home Office Deductions: Hoops To Jump Through
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • Year-End Tax Defferal Planning
  • How To Find A Great Financial Advisor
  • Is It Time To Find A New Financial Advisor?
  • What Is Risk?
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • Businesses Receive Temporary Depreciation Bonus
  • Understanding Deflation
  • Is Your 401(k) Plan A Failure?
  • Succession Planning: Developing A Plan For Your Business
  • The ERISA Retirement Plan Law Spells Out Fiduciary Issues
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Tax Issues To Consider When Buying A Long-Term Care Policy
  • Yesterday's Great Companies
  • Businesses Should Be Aware Of States' Use Taxes
  • Expanded Retirement Plan Contribution Limits Create New Opportunities For Business Owners
  • Succession Planning: Developing A Plan For Your Business



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