Wednesday, May 5, 2010

Our Faith in Stocks Is ____?

I'm sorry. The word we were actually looking for is "misplaced". Thanks for playing though!

Our faith in stocks is misplaced

Zvi Bodie says chartered financial analysts need to stop drinking the Kool-Aid that leads to the belief a long time horizon makes stocks safe investments.

The S&P 500 is lower now than it was on the last day of 1998. Here's the worst part. Stocks still aren't cheap.

Bodie says equity mutual funds and target date funds are not safe, though they rely on the notion that there's a free lunch investing in stocks for the long run. "There isn't."

People want to believe in free lunches and they also seem to think there is safety in numbers. If everyone else is making money doing something, then maybe I can too. Of course, once everyone else is making money off of something, it's often too late. The party is about over.

Given that interest rates seem to have nowhere to go but up, I asked Bodie if his personal overweight position in TIPS concerns him. It does. He owns no nominal bonds, which he concedes might do better under deflation. But "why would I want them? The whole point is I don't want to speculate on inflation."

I have been doing what Bodie is doing for the same reasons as Bodie and will continue to do so.

Am I scared of higher interest rates? Not really. Higher rates actually help me. I have a TIPS ladder and I hold TIPS until maturity. As TIPS mature I will be using the proceeds to buy more. I'd clearly rather buy TIPS that pay more interest than TIPS that pay less interest. It's just that simple.

I might not be that lucky though. I'm not exactly convinced that interest rates have nowhere to go but up.

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