Many investors today feel like they are on a lifeboat—stranded and squinting their eyes trying to focus on something in the distance, yet all they can see is an overwhelming amount of water and an endless horizon. They have no clue where they’re going—but they know they can’t go back to where they’ve been. That ship has already sunk.
This disoriented, stranded feeling is understandable. Over the past decade, Wall Street has taken unprecedented hits with the chaos following the tragedy of 9/11, the bursting of the dot-com bubble, the wave of corporate scandals including Enron and WorldCom, and the recent subprime mortgage and banking crisis. Wounded and weary, many investors are asking: Should I still trust the stock market?
Yes, but with caution, advises Jim Glassman in his new book, Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence(Crown Business). Glassman’s book introduces a calm and careful—but still lucrative—approach to investing. “For the near future, it makes sense to assume that volatility is here to stay—and that you need to find ways to protect yourself against it,” he writes.
For years, he says, financial advisors have favored stock-heavy portfolios, with a focus on U.S. companies. They advised investors to hang on through the swings in the market and "collect their reward for perseverance in the end," he says. Glassman, a veteran financial journalist for Kiplinger’s and other publications, was an enthusiastic advocate of this approach. In 1999, he co-authored Dow 36,000, a New York Times bestseller that held that U.S. stocks were undervalued, and predicted soaring new levels for the Dow Jones average.
Instead, he says, “accounting for inflation, the ten-year period ending in early 2009 was the worst in recorded stock market history—worse than the decade of the Great Depression.”
As the market dipped, many panicked and cashed in their stocks at the very time when their values were at their lowest.
Amidst the cracked and crushed nest eggs, Glassman, in his new book, takes a sobering look at what caused the fallout. While the rules for investing remained static, he says, “The world had changed. Profoundly.”
The Safety Net highlights four new realities, which Glassman says must guide future investments:
- The risk of financial catastrophe has increased, due to the development of larger and more complex investments, moving at faster speeds around the world.
- The U.S. is no longer the center of the economic universe. Emerging nations like China, India, and Brazil are now driving the global economy.
- Demographic imbalances are weighing heavily on mature economies. When Social Security started, there were 42 workers to every retiree; now there are just 3.
- The financial crisis of 2008-2009 brought emergency measures—including vastly greater debt—that will depress growth in the U.S., Europe, and Japan for years to come.
With these realities in mind, Glassman says that investors need a new strategy to adapt to a new world. He offers a “solid gain, modest pain” approach. “At a cost of one to two percentage points a year, you can invest with a real safety net to catch you if you fall,” he says, and provides well-informed, practical advice, such as:
- Most investors should make a shift towards owning more bonds, fewer stocks. Those 40 and older should not have more than 50% of their portfolios invested in stocks.
- Choose stocks that pay consistent dividends. It’s a good indicator of the company’s health.
- Look for value stocks, small- and micro-cap stocks, and the stocks of emerging economies.
- Aim for a 5 percent return from bonds.
- Invest in a bear fund, whose value rises when stock prices fall.
- Consider foreign currencies.
- Say "no" to commodities. They are simply too risky for most investors.
- Embrace tough times. The payoff for successful stock investing at times of high uncertainty can be enormous.
Glassman identifies the two kinds of risk every investor needs to know about, and lists 18 rules for creating an investment safety net. He shows readers how to find value stocks, and makes suggestions for specific stocks, bonds, and mutual funds to buy. He demonstrates how to create a “ladder” with bonds—to spread out their maturities—and expounds upon the necessity of rebalancing investments every year, to maintain target proportions. Above all, he argues the importance of creating a varied portfolio to avoid the pitfall of having all of one’s eggs in a single basket. “Most of the investing disasters of the past few years—the Enron scandal, the Madoff scandal, the tech bubble, the housing bubble—had something in common. The people who were badly hurt lacked the protection of diversification.”
Looking back on the previous decade, “I’m sympathetic with those who say they don’t ever want to go through the experience again,” he says. “The message of this book is that you don’t have to.”