“You Have No Business Owning Stock” – A Hard Truth to Hear

Here’s your slap in the face for this week – it’s a slap compliments of my Grill Quotient!

Yes, it’s my 100%-accurate, never-misses-the-mark, contrarian call based on what my buddies at my breakfast hangout are saying about money, the market and the economy.

I usually send this out to a couple of those buddies, but I’m afraid this one will sting – so let’s keep this between just us.

In a recent early morning conversation with one of the older members of my breakfast club, the depths of the financial literacy crisis in this country came crashing home in one succinct statement.

Before I get into the particulars about it, what you need to know is that the person who made this statement should know better. He comes from a money background, and he has a financial education – which makes what I’m about to share with you that much more unbelievable.

Everybody knows I have been a huge proponent of bonds for the past 30 years, and I’m not bashful about my opinions. That should come as no surprise to any of you.

It’s probably a mistake on my part, but whenever I get the opportunity to inject some market wisdom about diversifying into less-risky investments as we age, I take that opportunity. The outcome is usually the same: No one listens.

But the other morning, not only did this breakfast club member not listen… he came out swinging.

In response to my urging that he consider age adjusting, or holding his age as the percentage of bonds in his portfolio (or something approaching that number), to stabilize his principal and returns, he made the following statement…

“I only own common stock. I don’t own bonds because I want to earn more than 2%.”

Once again, the opinion from the Grill is 180 degrees out of sync with everything we know about the markets and reeks of a complete lack of market wisdom.

So here’s the straight dope…

This 82-year-old man has absolutely no business owning only common stock. At the very least, he should hold 50% to 60% of his portfolio in low-risk investments. If he were acting reasonably, he’d hold 70% to 80% low-risk bonds.

He would do this because as we age our ability to assume risk decreases and the time we have left to replace losses decreases as well. Not just the time to replace it, but the ability to replace losses.

If you’re on a fixed income, and he is, where’ll the money come from to replace a big loss in the market in an all-stock portfolio?

And this 2% yield number comes directly from the news media and is totally detached from reality.

High-quality corporate bonds with default rates of 1% or less – meaning they pay exactly as promised 99% of the time – pay between 5% and 7%. If you want to add just a little risk, in the BB category you can earn 8%, 9% and even 10%.

How much risk do you assume to get these 8% to 10% returns? About another half of a percent. You can earn between 5% and 10% and have about a 98% to 99% safety factor.

In fact, even the riskiest corporate bonds on the market, junk bonds, are more secure than common stock. Moody’s stated in its most recent credit summary that the default rate for the junk of the bond market is going to drop from 2.4% to 1.7%.

I have a B rated bond paying 17%, and based on its rating, its success ratio is around 97.6%.

When I say the average guy doesn’t have the faintest idea about what’s going on in the money world, I’m not exaggerating. Most people are so badly prepared to invest and manage their money, they shouldn’t be allowed to have wallets.

Just to put this in perspective, the long-term return of the stock market is around 7%. If you can earn 5% to 10% in your safe money – “safe” meaning a 97% to 99% success ratio – and you have no way to replace your losses, why would you risk it?

Based on this discussion, I’m absolutely confident that my Grill Quotient’s record of 100% accuracy is secure. Unbelievable!

Good investing,

Steve