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On Monday morning, The Wall Street Journal came out with a piece titled "Why Stocks Are Riskier Than You Think." The story encourages an investment in just about everything -- bonds, TIPS, options, and hedged ETFs -- except for companies on the stock market.
Though there was some sage advice in the column, Foolish readers should take comfort in the fact that most of the "proof" was quite selective, and once you look at the bigger picture, there's nowhere better to sock your long-term investments than in the stock market.
Ignoring the other half of the equation
One of the keys to the authors' argument was the fact that "the longer you hold onto stocks, the better the chance you'll run into a bear market." They then use this to argue that investing over long periods of time is, in fact, riskier rather than safer.
But there's a direct corollary that the authors conveniently forget: the longer you hold onto stocks, the better the chance you'll run into a bull market. Going all the way back to 1871, the stock market has produced annualized returns of 6.7% per year -- adjusted for inflation.
No advisor worth their salt would ever tell you to expect exactly that result every year. In fact, the market can be wildly variable. The past 10 years alone are proof of that, as the market actually lost more than 30% between 2001 and 2008, only to go on a ridiculous 105% gain from there.
The point still remains: Bull and bear markets are factored into the long-term equation, and neither can be ignored. There's nowhere else where you can average the type of long-term results that the stock market offers.
Bonds better than stocks?
The authors then follow up their warning about stocks by talking about the safety of bonds: "bonds outperformed stocks over the 30 years since the fall of 1981 -- delivering an average annual return of 11.5% vs. 10.8%, respectively -- with less risk and less volatility than equities."
We've actually already covered this one here at the Fool. The fact of the matter is that this 30-year reading is an anomaly; it's the first time it's happened. The authors counter this by stating that: "Since 1861, there have been only five non-overlapping 30-year periods! Statistically, that's simply too few independent periods to justify the conventional conclusions."
While that's true, the key word here is "non-overlapping." By using that word, the authors assume that the only time to get into bonds or stocks were at the beginning of every 30-year period (1861, 1891, etc).
Of course, that's not how investing works in the real world. If we were to take rolling 30-year averages (1950-1980, 1962-1992, etc.), we'd see that we have a sample size of 120, which I think is more than enough to convince the average investor that stocks will almost always do better than bonds.
Is this really simplifying?
Though most casual investors are able to wrap their heads around what it means to invest in bonds, the authors' suggestions for risk-averse investments in the market seem fairly complicated. They offer up a combination of options and "investment products that protect either principal or income by using hedging strategies involving various combinations of derivatives."
While these may end up being successful strategies, I tend to think that they are unnecessarily complicated and encourage investors to turn their money over to "professionals" to handle the confusing details.
But don't throw all the advice out
But as much as I think the data used for this argument are misleading, there are still nuggets of wisdom. For instance, they warn against playing catch-up with your investments for money lost in the Great Recession. Trying to get back money that you've already lost is a form of anchoring, and it can wreak havoc on your portfolio.
The piece is also careful to point out that you need to protect your safety net and make sure it's invested somewhere safe. Certainly, any money that you need -- or think you might need -- within the next three to five years should be stowed away somewhere safe and easily accessible (but probably not under your mattress).
There's a better way
For the average investor who wants to avoid the risky stocks, but still have a simple way to profit from the stock market, there is a better way: dividend stocks. By looking for companies with wide moats, solid business models, and stellar balance sheets, you can easily guarantee above-average returns for your investments.
I believe any one of these five companies offers excellent opportunities, and you should be very familiar with each of their easy-to-understand business models.
|
Company |
Easy to Understand? |
Dividend Yield |
Payout Ratio |
|---|---|---|---|
| Coca-Cola (NYSE: KO ) | It makes beverages, most of which you're likely very familiar with. | 2.9% | 51% |
| Johnson & Johnson (NYSE: JNJ ) | A company all-things-medical -- it provides everything from Band-Aids to surgical equipment. | 3.5% | 64% |
| Procter & Gamble (NYSE: PG ) | Check your bathroom; at least half of your products are likely from P&G. | 3.1% | 60% |
| Waste Management (NYSE: WM ) | The company that picks up -- and recycles -- your garbage on a regular basis. | 4.1% | 67% |
| Paychex (Nasdaq: PAYX ) | "Cuts checks" and sends them to employees of small and medium-sized businesses. | 4.1% | 84% |
Source: Yahoo! Finance.
Each of these companies will pay you for owning shares, and they all have room for growth in their dividend because of their low payout ratios -- though Paychex's is admittedly higher than the rest.
If, like me, you believe that the stock market is the best way to build long-term wealth, then I suggest you check out our special free report on dividends: "Secure Your Future With 11 Rock-Solid Dividend Stocks." Inside, you'll get 11 more suggestions for your dividend investing. Get your report today, absolutely free!
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Report this Comment On March 12, 2012, at 5:36 PM, vfy5 wrote:
I don't understand why you keep pushing Waste Management. Where I live, this year 4 communities have cancelled their contract with WM and gone with Veolia. If this is a sample I see WM as heading into trouble.
Report this Comment On March 12, 2012, at 6:13 PM, Seanickson wrote:
I completely agree. Bonds have had quite a run but they have nowhere else to go. The risk/reward has always favored stocks IMO but with bonds at record low yields future returns will be even more skewed in the favor of equities.
If you're looking to minimize risk, I would look for dividend-paying predictable companies with a long history of growing earnings and book value with no years of negative earnings. Personally, I believe WMT and KO are examples of companies who in my opinion fit this description
Report this Comment On March 12, 2012, at 6:43 PM, bretco wrote:
Paychex is living on borrowed time with awful customer service that will ultimately extract a high price. As a former customer the only thing good that can be said for them is they are better than ADP. Not much of a recomendation.
Report this Comment On March 12, 2012, at 7:11 PM, jm7700229 wrote:
@vfy5: basing your investment strategy on what you see from your front step is a good way of heading for trouble. I have investments in a number of companies with which I don't care to do business for various reasons. Check WMs numbers: they're pretty good. So are their prospects.
The WSJ article doesn't even make sense. Companies would not borrow if they couldn't make more on the money than they pay in interest -- hello? That's the point of leverage.
The fact that the total return of bonds has been high is a result of declining interest rates, which raise their principal value. But now there is nowhere for the rates to go but back up. In the meantime, they don't even keep up with inflation.
Report this Comment On March 12, 2012, at 8:23 PM, zeppelin1704 wrote:
Safety of bonds? Anybody else own GM bonds when the government threw out all the rules on who gets paid first in a bankruptcy? I will take my chances on stocks with dividends any day.
Report this Comment On March 12, 2012, at 8:40 PM, tweenthelines wrote:
TMF should publish the WSJ author's name and not just quote "The Wall Street Journal" Are we left to presume everyone at WSJ is long bonds and short stocks? Is the WSJ author short stocks? Sounds like more generic abstract gibberish from some knothead "analyst" who wants his readers to sell low and buy high.
Report this Comment On March 12, 2012, at 9:25 PM, TMFCheesehead wrote:
@tweenthelines-
I chose not to include the author's names and instead link to the story so interested parties could easily find out if they wanted to. Didn't want to distract from the main point of my piece by focusing on any individuals though.
Brian Stoffel
Report this Comment On March 13, 2012, at 2:15 AM, PeterGigante wrote:
I agree with TMF, particularly now given the historic bottoming of rates it is irresponsible for the WSJ to be pushing bonds. Though I haven't read the WSJ article and really should do so before commenting - maybe they qualified their statements as quoted by TMF?
Anyway, I do feel TMC should have provided the numbers that go along with the 30-year rolling average they mention, I think it would be interesting to see a chart lie that and a trend line that goes with it. It would not change my view as I generally agree with TMF, but seeing the numbers would have been interesting.
Report this Comment On March 13, 2012, at 8:08 AM, kayakmastr wrote:
Excellent rebuttal to a misleading article with faulty analysis! PS I've read the ariticle.
Report this Comment On March 13, 2012, at 8:53 AM, portefeuille wrote:
only to go on a ridiculous 105% gain from there
-----------
or over 200% for some U.S. small/mid-cap ETFs.
http://finance.yahoo.com/news/three-years-later-best-perform....
or maybe around 500% if you followed me or checklist34, hehe ...
http://caps.fool.com/player/portefeuille.aspx
http://caps.fool.com/player/portefeuille2.aspx
http://caps.fool.com/Blogs/fund-trades/716433
http://caps.fool.com/player/checklist34.aspx
Report this Comment On March 13, 2012, at 8:58 AM, portefeuille wrote:
The NASDAQ Composite Index will be up around 200% "in mid 2013" (since its 2009 bottom) if it keeps following its trend line ->
http://caps.fool.com/Blogs/nasdaq-chart/718519.
Report this Comment On March 13, 2012, at 3:41 PM, mikecart1 wrote:
mikecart1 Wisdom:
The longer you hold on to solid dividend paying stocks, the more likely you will run into a BEAR market and create your own BULL market. If you have a tons of shares of company paying you 5% annually in dividends. A company that is staying around because it has been around. You are hoping for it if you are smart that it will hit a bear market. At this point, you use the reinvestment of dividends and not feel too bad about it and then buy even more shares at the lower price. When the stock returns to an average lifetime level or even hits a real BULL market, you will have already made back your losses and way more before the real BULL market ever hits. Math is amazing when you realize the power of reinvesting dividends into solid companies that aren't going bankrupt anytime in your lifetime.
:)
Report this Comment On March 13, 2012, at 6:55 PM, TMFCheesehead wrote:
@mikecart1-
Totally agreed, in fact wrote an article recently on just that topic:
http://www.fool.com/investing/general/2012/02/13/why-a-poppi...
Brian Stoffel
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