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Question: My banker tells me it's time to get out of the stock market. What's your take on that?
April 2012
Question: My banker tells me it’s time to get out of the stock market. He recommends municipal bonds here in California, telling me they’re safer and that I’ll see steadier growth. He points to the losses in the stock market over the past 10 years and how it’s come back slowly and weakly, so that I’m back to about where I started 10 years ago. What’s your take on that?
Ric: First, let’s point out that bonds are not designed to grow in value. Instead, they earn interest. So to suggest that bonds will produce steady growth demonstrates a lack of understanding of how the investment works. His advice is suspect for that reason alone.
Telling you the market will not perform well for the next 10 years because of how it has performed during the last 10 years is silly. Why did he choose to look at a 10-year interval? Why not one year — or for that matter 100 years? A different time period would change his perspective. According to Ibbotson Associates, the S&P 500 Stock Index has gained 10% per year since 1926 — including the past 10 years.
And the past 10 years didn’t fare as badly as you might think. Fidelity, which manages millions of 401(k) accounts, reported last year that those who kept contributing to their accounts over the past decade saw their accounts more than triple in value. Remember, too, that many small and medium-size companies that are not part of the Dow and S&P 500 did quite well over the past 10 years. A well-diversified portfolio will hold a reasonable portion of those stocks too.
Be very wary when someone advises you to go from one extreme to another with your investments. It’s one thing to tweak a portfolio but quite another to suddenly turn in the opposite direction.
I don’t think you’re dealing with an advisor, but rather a salesman making statements based on gut feeling — not on analysis of the markets. He’s acting emotionally and clearly demonstrating a desire to avoid an investment solely because of its recent performance. He sounds like a guy who likes to buy investments after they have risen and sell them after they have fallen.
His recommendation that you buy bonds — muni bonds, of all types, and in California, of all places — in this interest rate climate is astonishing.
Fact: Bond prices move precisely opposite to interest rates. Rates are at historic lows; as rates rise, bond prices will fall.
Fact: Many municipal bonds are not guaranteed. As state and local governments struggle with the difficult economy, some of these bonds might default. California’s economy is among the worst in the nation, meaning many of its bonds are the riskiest of all. Yet your banker suggested them as being safer than stocks.
Fact: Warren Buffett, the world’s greatest investor, told Fortune magazine in February that bonds are the most dangerous investment in the world right now — so dangerous “they should come with a warning label.”
Who do you want to believe — your banker or Warren Buffett and me?
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