Is a "Pre-Disastered" Portfolio Safe?

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In John Irving's wonderful novel The World According to Garp, the protagonist and his wife are house-shopping when a small airplane flies into a home they're considering. The character decides on the spot to buy the house because it has been "pre-disastered."

In other words, he's figuring that the odds are pretty slim that an airplane would hit a house twice, so this one is probably safe. In fact, he's assuming that it's unlikely that any kind of terrible event would happen to the house now. Is he right? Not exactly. Sometimes the unlikely does happen. A friend of mine has had fireworks land on her head at two different fireworks displays. Some buildings have been struck twice or more by lightning.

Still, it's a useful way of looking at the world. Many people refer to long-term average annual gains of 10% for the stock market. But we can't count on 10% averages during our particular investing periods. There's just no way to know how we'll do over our specific 10-, 20-, or even 45-year span.

A pre-disastered market?
Even if we expect the stock market to average less -- say ,8% annually over the coming decade or two -- a sluggish market may seem like a pre-disastering. As of the time of this writing, the S&P 500 is down more than 12% year to date, and it's up less than 3% per year over the past three years. And since 1998? Its average total return has been just more than 4.5%. Depressing, perhaps, but it may bode well if stocks revert to the mean.

This kind of thinking is akin to how value investors view the stock universe. They tend to seek out stocks that have been slammed for some reason, and that can be expected to turn themselves around, appreciating in value. They hope all the bad events have already happened, and that perhaps good things lie ahead. Screening for such firms can be a good starting point for further research -- although not every stock that's seen its share price pummeled is a great candidate for a value investment. Here are a few examples:

Company	Return over past year
Qwest Communications (NYSE: Q)	(54%)
SunTrust Banks (NYSE: STI)	(29%)
Coach (NYSE: COH)	(31%)
Dow Chemical (NYSE: DOW)	(12%)
Intel (Nasdaq: INTC)	(16%)
Verizon (NYSE: VZ)	(11%)
J.C. Penney (NYSE: JCP)	(32%)

Data: MSNMoney.com.

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