Thursday, September 25, 2014

Stock Talk

--> -->A friend recently asked why I didn’t write more about the stock market, since this is the field I worked in for most of my career – and, presumably, that I know best.  I answered that I didn’t want to play the role of investment advisor, but on reflection, that was a cop-out. So here goes.

Stocks are risky. No matter how much you think you know about a company, there are people who know more, and these are the people who want your money. Forget the rules that say if you plug your age into a formula, you will know what percent of your wealth should be in stocks and what percent should be in bonds. The risk is the same whether you’re 35 or 75.

A friend of mine (and my mentor in the 50s) told me that he had two stock portfolios, one specializing in stocks designed to generate capital gains, the other investing in stocks that paid high dividends. And – funny thing – the yield-oriented portfolio had a consistently higher total return!  Moral: Stocks that pay a dividend are almost always better, and the results are even better if the dividend is well protected (i.e., a smaller percentage of estimated earnings).

Of course, one can always point to exceptions. You could have made a killing if you bought some Netflix a year or two ago, and Apple (a dividend payer, now) has been a good long-term investment. I have a small percentage of my investments in such speculations. I read all the business papers and am reasonably well informed, but you know what? The yield portfolio out-returns the trading portfolio, just as it did for my mentor in the 50s. Some things just don’t change.

So my initial advice is this: Look for a well-protected yield. That’s especially timely now, when bank yields are so low. Second, use the low-cost, on-line brokerages. You can buy or sell a stock for $8 a trade or less, which is a small fraction of what I paid 20 or 30 years ago.

Now that I’ve broken the ice, I will indulge in more “stock talk” in future blogs.